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Financial Sustainability

Nonprofit organizations not only provide goods and services, but also contribute to the economies of their communities and societies. Nonprofit organizations are involved in community development, informal, nonformal, and formal education activities and programs. They develop talents and human capital that benefit communities and societies in all aspects of life. They employ millions of people who contribute payroll taxes to their governments. Their employees are consumers who contribute to their local, regional, and national economies. Most of the services that they provide would not have been offered by for-profit businesses, because such services are simply not profitable. However, their contributions to communities and societies are linked to the challenges that they face in competing for resources, especially financial resources, that are necessary to continue to operate effectively.

Kingsley (2012) reported on the closing of various nonprofit organizations in southern Nevada. These organizations used to provide vital services to the chronically homeless and to clients with severe mental illness. For example, the Salvation Army of Southern Nevada had 80 clients with severe mental illness that they referred to a coalition of service providers. The Nevada Treatment Center closed its doors and transferred its indigent clients to human services agencies. Further, the Nevada Association of Latin Americans shut its doors and ceased to provide much-needed services, such as low-cost day care, HIV/AIDS treatment, and job training. Kingsley (2012) interviewed various nonprofit leaders who expressed their concerns about long waits for services, and increases in the unemployment rate and numbers of food stamp recipients in the area, because no group has filled the void left by the nonprofit organizations that closed their doors. There is no doubt that these organizations were very helpful to the neediest citizens in their communities. However, they could not continue to provide these services, which had constituted a great safety net for their clients. The question one may ask is, "Why did they have to close their doors?" Throughout the article, Kingsley (2012) provided the reason, which can be summarized in three words: lack of funding. For example, Kingsley (2012) asserted: "The Salvation Army had been losing money for years"; "Nevada Treatment Center ... shut its doors due to lack of funding"; "the founder of Nevada Treatment Center ... struggled to raise money"; and "the Association of Latin Americans ... filed for bankruptcy." As you may have noticed, lack of funding may have various explanations. In the case of the Salvation Army, they could not afford the expenses of providing intensive care for their severely mentally ill homeless clients. The Nevada Treatment Center relied mostly on state funding and could not raise enough money from other sources. The Association of Latin Americans filed for bankruptcy over possible allegations of mismanagement or fraud. Regardless of the explanation, the outcome is the same for these nonprofit organizations: They dissolved and could not continue to provide services to their clients. They were not financially sustainable. What could they have done differently as nonprofit organizations?

Bassett and Mitchell (2006) suggested six steps related to the financial sustainability of schools:

1. Trend analysis: The purpose is to identify key financial trends that can help make financial projections. Trends can be identified through internal financial data and in comparison to other similar organizations.

2. Ratio analysis: Ratio analysis is performed to obtain a snapshot of current key ratios that will help in strategic financial planning. Key ratios can be compared against comparable institutions to observe variance, similarities, and differences.

3. Evaluating financial planning assumptions: This step aims to help an institution identify objective assumptions that will enable it to make policy decisions and strategic choices related to financial growth and stability to achieve a stronger long-term financial position.

4. Establishing markers of school success: This step consists of identifying and setting goals that can ensure anticipated positive outcomes and financial equilibrium. This implies that the institution must develop a budget that is adequate to ensure success, as well as to serve as a benchmark to measure continuing progress.

5. Re-engineering strategies: This fifth step relates to adopting strategies that are the most likely to help achieve key financial objectives. Part of developing re-engineering strategies includes taking into account potential financial vulnerabilities and strategies to overcome them.

6. Projecting multiple scenarios: The final step is to test various financial scenarios through projection and plans for the envisioned financial future.

The Basset and Mitchell (2006) model is sequential, although I would argue that financial sustainability is a multifaceted process, not a finite project. In addition, the model is similar to a classic strategic-planning process. Obviously, the model was developed for independent schools. Therefore, other types of nonprofit organizations might need to consider additional factors when planning for financial sustainability. However, the model has the merit of outlining specific strategic initiatives and actions that may help nonprofit organizations maintain better financial management practices and take them on path toward financial sustainability.

What is financial sustainability for nonprofit organizations? For for-profit businesses, financial sustainability is easy to define because the bottom line is money. A business achieves financial sustainability once it is able to deliver products and services to customers at a price that covers all its investment and operating expenses and generates sustained profit for its owners. It is different for nonprofit organization, because the bottom line is not money, but vision, mission, and values. In other words, although financial sustainability is inherent to finance, it must also account for the ability of a nonprofit organization to further its mission. Financial sustainability for nonprofit organizations is the ability of an organization to maintain a diverse source of revenue that enables it to continue to provide ongoing quality services regardless of changes in funding sources, in target population, and other changes among its internal and external stakeholders. Financial sustainability is the ability of a project, a program, or an organization to maintain broader sources of funding in order to provide standard services to its clients over time. Financial sustainability is a process, not an end. It can be evaluated through

(a) Profitability or the surplus of revenue over expenses

(b) Liquidity or the ability to meet cash requirements (e.g., paying bills)

(c) Solvency or the ability to pay all debts if the business were sold tomorrow

(d) Efficiency or the ability of an organization to deliver the maximum service possible with the lowest amount of human, material, and financial resources

(e) Effectiveness or the extent to which an organization uses its resources adequately to fulfill its mission and vision

 
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