GAPS IN FINANCIAL KNOWLEDGE CHALLENGE MID-SIZE NONPROFITS
INDIANAPOLIS—A new survey of financial managers at mid-size nonprofit organizations reveals gaps in their financial knowledge, even as they grapple with economic challenges.
The study was conducted by the Center on Philanthropy at Indiana University to help nonprofits understand and increase their financial knowledge levels and improve their effectiveness. Nonprofits’ knowledge, policies and procedures were studied; some results were positive, while others revealed a clear need for financial education.
More than 500 nonprofit professionals who are most responsible for their organization’s overall financial management were surveyed. The study is a random sample of primarily human services nonprofits, as well as health, civic, environmental, arts and education nonprofits (excluding hospitals and higher education institutions) with revenues of $1 million to $5 million. The Moody’s Foundation sponsored the study.
“Seventy-six percent of financial managers at mid-size nonprofits said they are knowledgeable about financial principles, but only a third correctly answered all three basic financial literacy questions asked,” said Una Osili, director of research at the Center on Philanthropy. “This disconnect has potentially significant implications for nonprofits and the donors who place their trust in them. Solid financial knowledge is critical to sound decision making as nonprofits strive for financial well-being and greater impact.”
The survey is among the first to show a shift in financial priorities. Until recently, nonprofits this size often focused on just breaking even. The findings indicate they are now putting more emphasis on longer-term planning and sustainability. The top three financial objectives among nonprofits surveyed were:
- Maintaining a targeted level of cash reserves and financial flexibility (38 percent).
- Assuring an annual surplus so the mission can be achieved in down years (27 percent).
- Breaking even financially (24 percent).
“As Americans seek to enhance their knowledge of their financial circumstances, they also have greater expectations for organizations they support,” said Patrick M. Rooney, executive director of the Center on Philanthropy. “Nonprofit managers and board members need a high level of financial literacy to establish a sustainable, long-term financial plan, maintain a healthy cash balance and fulfill their missions effectively.”
Nearly half (49 percent) of mid-size nonprofits had less than three months’ worth of cash reserves for operating expenses available. A quarter (26 percent) had four to six months’ worth on hand, while another quarter had more than seven months of operating expenses.
Other key findings:
- Respondents said they were knowledgeable about negotiating with banks or lenders (78 percent), cash flow projections (75 percent) and financial scenario planning (72 percent).
- Only 46 percent reported knowing about debt restructuring.
- Financial literacy increased with the number of courses taken in accounting, economics, operations and financial management, and with the nonprofit’s revenue.
- Boards were involved in accountability (66 percent), but less so in managing investments (38 percent), developing budgets (30 percent) and scenario planning (27 percent).
- Less than 40 percent of nonprofits surveyed had an audit committee.
“There are strengths in these nonprofits’ financial knowledge and management, but there’s room for improvement,” Osili said. “Increasing financial training for boards and staff, recruiting financial leaders to serve on boards, using audit committees and greater use of external financial indicators would help nonprofits improve their financial planning and performance.”
With 526 respondents, the Financial Literacy and Knowledge in the Nonprofit Sector Study is a random sample of medium-size nonprofit organizations, i.e., those with organizational revenues between $1 and $5 million. It is not meant to be a nationally representative study of all nonprofits in the U.S.
The 2012 Financial Literacy and Knowledge in the Nonprofit Sector Study is available on the Center on Philanthropy’s website at http://philanthropy.iupui.edu/Research/docs/2012FinancialLiteracy.pdf.
About the Center on Philanthropy
The Center on Philanthropy at Indiana University, a part of the Indiana University School of Liberal Arts at Indiana University-Purdue University Indianapolis, is a leading academic center dedicated to increasing the understanding of philanthropy and improving its practice worldwide through research, teaching, public service and public affairs programs in philanthropy, fundraising, and management of nonprofit organizations. For more information, go to www.philanthropy.iupui.edu.