The Financial Health of the United States Non-Profit Sector

EXECUTIVE SUMMARY

Nonprofits play a critical social role in improving education, alleviating poverty, providing economic opportunities, supporting the health care system, and sustaining the arts. Their health is vital to our nation. So, when they face financial distress, it creates hardship for some of the most vulnerable and fragile segments of society. It also means that hardworking staff may lose paychecks or pensions and that trustees may be exposed to personal liability.

Our analysis shows just how fragile the nation’s nonprofits really are:

• 7-8% are technically insolvent with liabilities exceeding assets

• 30% face potential liquidity issues with minimal cash reserves and/or short-term assets less than short-term liabilities

• 30% have lost money over the last three years

• ~50% have less than one month of operating reserves
  

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. Changes to 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.

Risk management can reduce the likelihood of financial distress. It should be an important part of every trustee’s duties of care, loyalty, and obedience. In this report, we offer a set of recommendations for organizations serious about adopting robust, “best in class” processes to manage risk: scenario planning, benchmarking, and environmental scans.

However, risk management by individual organizations is only part of the solution. Funders – both government and philanthropic – must also change their policies and practices for nonprofits to be financially healthy and stable in the long-term. We suggest some ways they might do this, including changing the nature of funding and creating sector-wide infrastructure.

In this report, we provide some context setting with a brief overview of the size and scale of the US nonprofit sector and why its financial health matters. We look at the financial vital signs of the sector, analyzing key financial metrics segmented by size, sub-sector, and geography. We describe practical steps that trustees and their organizations can take to strengthen their financial position. Finally, we offer some long-term ideas for how funders and the rest of the ecosystem can actively reduce the risks of financial distress in the nonprofit sector. We conclude with an appendix of tables summarizing key financial health indicators for the sector.

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