An analysis of the nonprofit sector’s financial health highlights a strong imbalance among organizations, finding that many are struggling to make ends meet. The report recommends that nonprofits plan for risk and donors limit restrictions on how nonprofits can use funding.
A new report from GuideStar comes with a stark conclusion: A huge number of nonprofits are teetering on the edge of financial peril.
According to The Financial Health of the United States Nonprofit Sector, released this week [registration] and produced by Oliver Wyman, GuideStar, and SeaChange Capital Partners, the nonprofit industry as a whole is a financial force—representing 5.5 percent of gross domestic product (GDP) and a 10th of the U.S. workforce.
However, looking at a micro level, a stark picture appears: The report says that more than 7 percent of nonprofits are technically insolvent, while 30 percent struggle with cash reserves and another 30 percent have lost money in the past three years. Most startling of all, around half of all nonprofits have less than a month of reserves at the ready.
“The scale of the problem is vast. In fact, just restoring currently insolvent nonprofits to solvency would require an injection of $40 to $50 billion dollars,” the report states. “Changes to the federal tax code may exacerbate the issue, by changing charitable donations and/or by increasing the likelihood of future pressure on federal budgets for human services.”
The report, which is based on Form 990 data from the years 2010 to 2014, reveals a very imbalanced picture, where slightly more than 2 percent of the nonprofits that file 990 forms account for roughly 80 percent of the expenses, while two thirds of all nonprofits have operating budgets of less than $1 million.
Much of the value in the sector is concentrated in healthcare and educational nonprofits, while religious, arts, youth development, and environmental organizations each make up less than 3 percent of total financial expenses reported by the group.
For small nonprofits struggling with their financial picture, the report lays out a series of recommendations for both boards and outside stakeholders, including (in the case of the former) implementing scenario planning for potential risks that rise and (in the case of the latter) providing more flexible funding with fewer limits on the ways that nonprofits can spend the money they receive. The report also recommends, in situations that require it, that nonprofits restructure, merge, or even close.
The report did raise skepticism among some observers in the nonprofit sector. At Nonprofit Quarterly, Hamline University’s Jeannie Fox discouraged looking at the report with a disaster-minded viewpoint. She noted that many new for-profit businesses struggle all the time, just like nonprofits, with 90 percent of startups shutting down over time.
“In other words, the stats here do not seem to indicate catastrophe, but only that the road is difficult sometimes and that we should check the state of our vehicles regularly to ensure we can meet our commitments,” she wrote.