News and analysis
February 29, 2012

Many Managers of Nonprofit Finances Suffer Knowledge Gaps, Study Finds

Top officials at midsize nonprofits lack basic financial knowledge, according to a study released today.

The study, conducted by the Center on Philanthropy at Indiana University, also found that midsize organizations are lifting their focus from just breaking even to long-term planning.

The study surveyed more than 500 nonprofit officials who manage the finances of their organizations, which had revenues of $1-million to $5-million. Three quarters of the managers said they consider themselves financially knowledgeable, but just 36 percent correctly answered three questions they were given to assess their basic financial skills.

“This disconnect has potentially significant implications for nonprofits and the donors who place their trust in them,” said Una Osili, director of research at the Center on Philanthropy. “Solid financial knowledge is critical to sound decision making as nonprofits strive for financial well-being and greater impact.”

Board Involvement

Among the study’s other findings:

  • About 78 percent of those surveyed said they were knowledgeable about negotiating with banks or lenders. Three-fourths said they knew about cash-flow projections.
  • Just 46 percent said they knew about debt restructuring.
  • About 38 percent said their boards were involved in managing investments, 30 percent said their trustees were involved in developing budgets, and 27 percent said their board participated in efforts to shape how the organization would respond to a range of threats and opportunities.

The survey, sponsored by the Moody’s Foundation, also found that midsize nonprofit organizations continue to struggle to recover from the bad economy. About half of the organizations surveyed had less than three months’ worth of cash reserves for operating expenses. A quarter had four to six months’ worth, while another quarter had more than seven months’ worth.

Researchers who conducted the survey describe their report as among the first to show midsize nonprofits shifting their priorities from simple survival to a greater focus on long-term planning and sustainability. The top three financial objectives among those surveyed were:

  • Maintaining a specific level of cash reserves and financial flexibility (cited by 38 percent of respondents).
  • Assuring an annual surplus so the charity’s mission can be achieved in financially challenging years (27 percent).
  • Breaking even financially (24 percent).

Patrick Rooney, head of the Center on Philanthropy, said nonprofit managers and boards need a high level of financial literacy to handle the long-term financial needs of the organizations they lead.

“As Americans seek to enhance their knowledge of their financial circumstances, they also have greater expectations for the organizations they support,” he said.