An Evaluation of Nonprofit Financial Performance: Athens, AL – Athens State University

An Evaluation of Nonprofit Financial Performance:
Athens, AL
(FY2010-2012)

Joshua R. Zender, Ph.D., CPA
Assistant Professor of Accounting

Katie Gilman
Student- Accounting Major

Traci Durgin
Student- Accounting Major

Athens State University

Abstract

Since the economic crisis of 2007-2008, nonprofit organizations have been under increased fiscal stress. While other studies have examined nonprofit sector trends at a national level, few have explored how nonprofits operating in the Northern Alabama region have fared in the post-recession era. This paper specifically focuses on the financial health of not-for-profit organizations operating within Athens, AL between the years 2010 through 2012. Utilizing financial information disclosed on the I.R.S. Form 990, we examine financial trends and ratios commonly applied to the nonprofit sector. Financial ratio analysis is considered the premier evaluation technique to measure an organization’s efficiency. Our study finds that organizational size may be one determinant of surviving economic distress. Additionally, local nonprofits appear to be outpacing national trends in several important respects. We conclude local nonprofits are fiscally stable in wake of the recession, but opportunities to improve financial management practices still exist.

Introduction

By any measure nonprofit organizations contribute in important ways to the social and economic vitality of local communities. Nonprofits contribute over 6% towards national gross domestic product and offer 9% of all compensation paid in the United States. In 2010, public charities reported over $1.51 trillion in revenues and $2.71 trillion in total assets (NCCS, 2012). Foundations alone give over $47 billion each year (Lawrence, 2012). Charities are uniquely demarcated through their service to others and serve as beacons of hope for many in our society. On an annual basis, individuals give over $220 billion to support nonprofits (Giving USA, 2012). Diverse in mission, scope, and other features, these organizations provide vital services to their stakeholders without distributing profits to individual owners. While some organizations are “public-serving” and others “member-serving” (Hall, 2002, p. 22), principles of sound financial management practices apply to all successful nonprofit groups. Given their key role in our community, this study examines the financial condition of local nonprofit entities.

Currently, there are approximately 130 active nonprofits headquartered in Athens, AL (GuideStar, 2014). On a per capita basis, the local nonprofit market presence is similar to national averages of one charitable organization for every 150 citizens (NCCS, 2012). While the term “nonprofit” conjures up images of public charities for most people, a diversity of other entities also meet tax-exempt status under the law. Consequently, there are more than thirty categories of nonprofits under the U.S. tax code enabling less conspicuous charitable organizations, such as the National Football League (NFL), to qualify for favorable tax status (IRS, 2014). Athens is home to a wide range of nonprofit entities, including public charities, foundations, civic groups, professional associations, and churches. As reflected in Figure 1, religious institutions represent nearly a quarter of all tax-exempt organizations in the area (often characterized as the heart of the nation’s “Bible Belt”). Over 30% of nonprofits in the area are foundations, social service providers, or civic clubs. The area also supports several trade associations, veterans groups, educational, and cultural organizations.

Figure 1: Athens Nonprofit Organizations by Function

 

 

 

 

 

 

 

 

 

Source: GuideStar (2014)

Consequently, Southeastern residents tend to be the most generous charitable givers in America, as a proportion to their total discretionary income (NCCS, 2012). Athens residents are no exception to this rule as local nonprofits collected nearly $10 million dollars in revenue last year (or $445 average gross revenue per citizen). However, these donations represent only a fraction of the amount collected by neighboring cities. Charities in Huntsville and Decatur, communities with higher household net worth, collected more than $2,500 in average gross receipts per citizen (Advameg, Inc., 2014). Given the fact that Athens nonprofits compete for market share and collect less revenue from their neighboring competitors, sound financial management practices, as explored in this study, are of elevated importance within this local community.

Literature Review

Scholarly works in the nonprofit sector span multiple disciplines. Consequently, several prominent theories about the nonprofit sector have emerged. Historians tend to focus on evolution of the sector within America based on changing social needs (Hammack, 1998; Salamon, 2002). Sociologists examine the voluntary sector’s role in shaping social values and capital (Lohmann, 1992; Payton, 1988). Political scientists examine the role the nonprofit sector plays on public policy and easing government bureaucratic demands (Osbourne & Gaebler, 1993; Rourke, 1969). Economists explore how nonprofits fill the void of market failure and government inefficiencies (Hansmann, 1987; Young, 2001). Business and accounting scholars, as a general rule, focus research efforts on how best to optimize nonprofit management activities (Anthony & Young, 2005; Coley, 2014; Zeitlow, 2003). For the purpose of our research objectives, giving and resource dependence theory are most germane.

The two primary reasons people give is “altruism, that is, individuals driven by their nature to help others and improve the human condition… [and] personal benefit, perhaps recognition, social position, or control” (Worth, 2014, p. 270). The decision on how much is given is ultimately based on the donor’s faith the organization will effectively manage their donation and generate a positive social return. Miller (2010) points out the average organization derives approximately 13% of its total revenue from private contributions with the vast majority of funding coming from a handful of top donors. One of the primary means nonprofits secure trust with their top donors is by demonstrating accountability.

“To be accountable essentially means being required to answer, to take responsibility, for one’s actions” (Worth, p. 127). There exists an inextricable link between public accountability and civic organizations. The very “concept of accountability in America is historically rooted in Anglo-Saxon values and distrust of authority” (Adair & Simmons, 1988, p. 91). Adair and Simmons (1988) point out that even the Continental Congress held their own leader, General George Washington, to account through the establishment of an inspector general to oversee his army. Zender (2011) further notes progressives of the 20th century held an underlying optimism that by making information public, accountability and transparency would be advanced. In fact, the progressives established the first accounting and auditing standards used by nonprofits. In recent years, accountability initiatives have focused on service-oriented metrics and meeting customer needs (Osborne & Gaebler, 1992).

Hopkins and Gross (2010) note in recognition of the importance of their special role of nonprofit entities in society, Congress has afforded these organizations tax-exempt status. In addition to not having to pay a corporate tax, special benefits are also afforded to donors of the nonprofit entities. In the case of 501(c)(3) organizations, donors are allowed to deduct charitable contributions from their personal income tax returns. FASB (1993) highlights that nonprofits must meet all of the following criteria: 1) contributions of significant amounts of resources from providers who do not expect commensurate or proportionate pecuniary return; 2) operating purposes other than to provide goods or services at a profit; 3) absence of ownership interest. According to FASB, nonprofits may only generate profits under the following circumstances: a) to replace or expand equipment and facilities; b) to provide working capital; c) to retire debt; and d) to continue programs beyond the time frame when seed money grants are available.

From a resource management perspective, nonprofit organizations can best be understood as “open systems” (Aldrich, 1999; Ott, 2001). As opposed to being insulated from outside influences, nonprofit organizations are dependent on and interact frequently with their external environments. For example, they may be forced to adapt to the grant rules imposed by a governmental entity or honoring a designation made by a donor. Resource dependency, a form of open systems theory, suggests that the primary catalyst for organizational adaptation is money. For example, United Way, a distributor of fund raising resources, “holds considerable influence over organizations and can require that they follow its approach to measuring effectiveness” (Worth, p. 60). Organizations will have a tendency to align their goals and focus on performance targets that will reap the greatest financial benefit to the organization.

Sustainability is also a major focus for every nonprofit. Sustainability, as defined by Bell, Masaoka, and Zimmerman (2010), “encompasses both financial sustainability (the ability to generate resources to meet the needs of the present without compromising the future) and programmatic sustainability (the ability to develop, mature, and cycle out programs to be responsive to constituencies over time).” The ability to deliver services or strengthen the organization’s capital depends on the delicate balance of mission spending and sound financial management. Furthermore, in sustaining a not-for-profit, careful attention and oversight should be taken to examine the financial health from both a short-term and a long-term perspective. Donors are concerned about the sustainability, or the going-concern, of the prospective organization they intend to direct their money.

Financial Management over Nonprofit Organizations

Financial management and oversight for all nonprofits rests solely on each respective governing board. Primoff (2012) clearly defines their roles and responsibilities as “setting strategic direction, having stewardship over the organization’s resources, approving and overseeing mission-based programs, holding managers accountable, ensuring legal compliance, setting the budget, and performing related fiduciary oversight.” He further notes a board’s responsibility for fundraising and development, setting staff compensation, investment management, and financial statement audits. Board members and staff must communicate, in a reasonable timely manner, the risks associated within the nonprofit and work together to develop an effective course of action. An important tool for assessing risks includes a robust examination of financial trends and indicators.
Financial ratios are used by both internal and external parties to evaluate the performance of voluntary organizations. These financial analytical techniques have been used for years within the private sector to assess corporate financial health. While some financial measures are applicable within the voluntary sector, many need to be adapted around the unique missions of each nonprofit organization. As one example, Fremont-Smith and Cordes (2004) looked at ten charity watchdog organizations and found a variety of measures being applied. With that said, the literature points to certain key metrics. Anthony & Young (2005) find that analytics most commonly used by nonprofit organizations include revenue diversification, resource management, liquidity, and solvency (p. 488). Noteworthy contributions in the literature have been structured around these four key financial strategies.

Revenue diversification

Revenue sources include “government grants and contracts, fees and dues charged to clients and customers, contributions from individuals, foundations, corporations, and federated funders, and interest from investments or endowments” (Frumpkin & Keating, 2011, p. 152). Revenue diversification, a practice sought in the commercial sector, is a way to reduce the risk. A nonprofit “dependent on one or a few revenue providers is vulnerable to declines in the economic health or changes in the donation preferences of those providers” (Trussel & Parsons, 2008, p.4). Donors also have the ability to restrict assets until time or purpose agreements have been satisfied. Fund restrictions for nonprofits fall under these three categories: unrestricted, temporarily restricted, and permanently restricted (Copley, 2012, p. 309).

Revenue sources can and should vary from one nonprofit to another. For example, a ballet school will often receive funds through various sources, such as individual donations, event-based fundraisers, membership fees, ticket sales, tuition, and foundational support. On the other hand, bird and wildlife sanctuaries may receive the dominant source of funding from grants. “Funding from government sources has varied over time with changes in political leadership and public policy initiatives” (Froelich, 1999, p. 248). The government has an interest in offering many services and programs currently provided through nonprofit organizations and provides grants as a way to do so while minimizing taxpayer costs by allowing nonprofits to organize and provide the service instead (Osbourne & Gaebler, 1993, p. 125). Brooks (2006) notes that nonprofits “create public goods and services, such as arts, education, social service, which people want, but have limited incentive to pay for voluntarily with donations” (p. 303).

Resource management

Efficiency relates to the study of the conversion of resources. Under ideal circumstances, the minimum level of inputs should be used to produce the maximum output. Financial managers must be concerned with how efficiently assets are being used. Brooks (2006) notes an efficient organization “does the most with the least” (p. 305). In a nonprofit context, donors are particularly concerned with the amount of overhead expenses in relation to direct program services. “Various attempts have been made over the years to define acceptable ratios, with desirable program expenses usually somewhere in the range of 60 to 80 percent, and/or acceptable fundraising ratios generally no more than 15 to 30 percent” (Larkin, 2013).
Liquidity

Zeitlow (2007) finds that the biggest problem for many nonprofit organizations is “their ability to augment their future cash flows” (p. 23). Liquidity relates to the practice of having sufficient cash in order to meet liabilities as they come due. If organizations struggle with collecting money from their customers in a timely fashion, they will need to maintain larger cash balances. Effective management of inventories would be another example of liquidity risk. If too much money is committed to inventories, organizations may have unfavorable cash liquidity in meeting commitments as they arise. Monitoring financial ratios relating to key financial accounts, such as accounts payable, inventories, cash and short-term investments, and accounts receivable is an effective method for monitoring liquidity.

Solvency

Solvency reflects the financial strength of an organization. Most analysts rely upon the Statement of Financial Position, similar to a balance sheet in the private sector, to determine the solvency of a nonprofit entity. In the equity section of this financial statement, separate totals are given for unrestricted, temporarily restricted, and permanently restricted assets (Copley, 2014, p. 324). Equity is a crucial going concern element to consider for long-term projection of capital growth. Organizational growth, if one chooses to grow, requires disciplined budgeting and planning in order to overcome capital constraints. The equity ratio is a useful tool to “alert an organization to trouble down the road and it may also shed light on why it is struggling in the short run” (Bowman, 2007, p.1). Anthony and Young (2005) highlight the importance of monitoring risk associated with carrying large levels of debt by watching solvency measures.

Table 1 reflects eleven common financial ratios used by nonprofit organizations across each of these four respective categories:

Table 1: Eleven Common Financial Ratios of the Nonprofit Sector

RatioFormulaMeaning
Revenue Diversification
Revenue source dependency(revenue element – e.g., grants, donation) / (total revenues)Identifies revenue diversification by analyzing how each revenue stream contributes to the organization’s total revenues.
Revenue growth rate(period 2 – period 1) /
Absolute value (period 1)
A metric of sustainability and overall effectiveness of fundraising campaigns.
Resource Management
Personnel Cost Ratio(wages, taxes, and benefit expenses) / (total expenses)Percentage of budget used for staff and benefits. Personnel is usually the largest cost.
Fundraising efficiency(contributed income) / (fundraising expense)Average dollar of contributions raised from each dollar spent on fundraising activities.
Program Service Efficiency(program service costs) / (total functional expenses)Funds spent for program expenses compared to all expenses.
Liquidity
Current Ratio(current assets) / (current liabilities)This ratio evaluates the organization’s ability to meet short-term demands.
Defensive Interval(cash + securities + receivables) / (avg. monthly expenses)Indicator of how long an organization’s cash reserves will last if no additional funds are received.
Conversion Accounts Indicator(PPE – unrestricted N.A. + accounts payable) / (avg. monthly expenses)A cautious indication of the number of month(s) expenses can be paid through use of existing assets.
Solvency
Debt to Assets(total debt) / (total assets)A high value indicates problems with liquidity or reduced capacity for future borrowing.
Net Asset Total(net assets) / (total expenses)A comparison of the overall equity of an organization in relation to annual expenses.
Temp. Res. Net Assets(temporarily restricted net assets) / (cash + investments + pledges)Useful in determining if an organization is spending restricted cash for unrelated purposes.

Source: Copley, 2014; Anthony and Young, 2005; Nonprofit Assistance Fund, 2008

Methodology

To assess the financial health of nonprofit entities, data was extracted from Internal Revenue Service (IRS) publicly available tax filings for nonprofits in the Athens area for the three most recent fiscal periods, 2010-2012. Not-for-profit organizations, with the exception of religious institutions, must file an information return with the IRS on an annual basis so tax agents can monitor charitable activities. Different versions of the return must be filed depending on the size of the organization. The Form 990 provides both financial and nonfinancial information. According to official IRS guidance, tax-exempt not-for-profits with annual gross receipts of $500,000 and total assets of less than $2.5 million may file a short-version Form 990. Larger organizations must file a standard Form 990. Major sections of the Form 990 include a statement of program accomplishments, disclosures relating to governance and management, compensation schedules, and financial information. Form 990s filed by nonprofit organizations are made publicly available on Guidestar, which collects and disseminates information for all registered nonprofits. The financial section was relied upon for the purpose of this study.

Financial information required by Form 990 is similar to FASB financial statements, except the cash flow statement is omitted. The Form 990 includes a Statement of Revenues, Balance Sheet, and Statement of Functional Expense. Financial statements are intended to summarize the monetary actions of the entity over the fiscal period and its position at year-end. Financial standards ensure consistency and comparability. The board of directors and upper management will use accounting information for strategic planning purposes. Other external parties, such as donors, grantors, creditors, and IRS, read the information to ensure the organization is utilizing resources in accordance with its stated purpose. Donors, for instance, like to see more of their money being used for direct program services as opposed to overhead.

After extracting financial data from the Form 990, organizations were stratified into small (less than $50,000 in revenues), medium (revenues $50,000-$200,000), and large clusters (revenues greater than $200,000). Once the organizations were categorized, financial ratios were calculated for benchmarking purposes. Both horizontal and vertical measures were calculated. Horizontal measures reflect actual results of operations against the performance in the prior year. Vertical analysis is relational in nature, such as comparing two or more financial accounts, and standardizes data. Benchmarking nonprofit organizations with one another is considered a helpful technique in understanding the performance of individual entities. Financial management indicators are useful to local nonprofit managers, donors, and local political leaders for decision-making purposes. The selection of key performance indicators was dictated based upon the results of our literature review.

Limitations

Shortcomings in the public nature of nonprofit financial data limited our study in several important ways. First, only the three most recent fiscal periods were made available. Data prior to 2010 was generally not accessible. Likewise, most organizations have yet to post their fiscal year 2013 tax filing. As such, data from fiscal year 2010, 2011 and 2012 was used for the purpose of the analysis. The second limitation was the fact that smaller organizations, filing Form 990-EZ, are not required to disclose all elements of a traditional financial statement. As such, several of the financial ratios could not be calculated for organizations filing Form 990-EZ. On a final note, the research team identified several data entry errors on the Form 990s. In these cases, the information was simply omitted from analysis.

As noted previously, religious organizations are the most common form of charitable organization in the Athens area. Furthermore, religious organizations generally receive the largest share of contributions, 32% of total estimated donations (Giving USA, 2012). Unfortunately, we were unable to include religious organizations in our analysis as they are exempt from filing Form 990s and their financial statements are rarely made public. All other types of nonprofits were included in our analysis, but as noted in the observations section, commingling all types of nonprofits likely positively skewed some key financial measures due to significant cash reserves maintained by some entities, such as foundations.

At a conceptual level, some scholars question the appropriateness of applying financial ratios, a technique commonly used to evaluate performance of commercial enterprises, when benchmarking nonprofits. Professional organizations, such as Guidestar, Charity Navigator, and BBB Wise Giving Alliance, and other nonprofit watchdogs, have issued various guidance cautioning their users of the misconceptions of comparing financial ratios between nonprofit organizations. Coffman and McLean (2004) claim that ratios taken by themselves “can be more misleading than helpful.” Frumpkin (2004) notes “features might make nonprofit and voluntary organizations appear weak, inefficient, and directionless, but nothing could be further from the truth.” (para. 1). Kotloff and Burd (2000) state “nonprofit organizations are rarely judged solely by their financial bottom line; instead, their worth is gauged by the effectiveness of their services and how successfully they achieve their mission” (p. ii). While we acknowledge these limitations, the intent of our study is not to be a panacea for evaluating nonprofit performance. Our study is merely one perspective of many that should be taken into consideration when evaluating the overall health of entities operating within the Athens jurisdiction.

Research Findings

Our analysis revealed notable distinctions in the financial status of nonprofits when compared to national averages. First, nonprofits in the Athens area rely to a greater extent upon contribution revenues, such as fundraising campaigns, governmental grants, and other forms of donations from outside parties, to sustain operations. At a national level, over 70% of nonprofits funding comes from program service revenues or direct charges to program recipients (NCCS, 2012). In Athens, approximately 45% of funding comes from program revenues and contributions, respectively. Meanwhile, 10% of funding comes from other miscellaneous sources, such as unrelated business income and gains/losses from sale of assets. More extensive reliance upon donations could be a function of the charitable nature of affluent citizens within the Southeast. Another contributing factor may be the region’s high poverty rate of 23% (BLS, 2014), which means fewer recipients can pay for the services they receive from these charities.

The composition of charitable organizations within the region is also unique. Of the 36 organizations examined, five (13%) were foundations and four (11%) did not hold 501(c)3 status. At a national level there are over 1.5 million tax-exempt organizations, however only 6% are foundations and 31% do not hold 501(c)3 status, such as chambers of commerce, fraternal organizations and civic leagues (NCCS, 2012). The Athens area supports a higher number of public charities and foundations per capita (organizations qualifying under IRS section 501(c)3). Meanwhile, other types of nonprofit organizations, lacking the popular personal charitable deduction, are far less common.

In addition to these general observations about the nonprofit sector in the Athens community, several interesting observations come to light by stratifying the locally based nonprofit organizations by total revenues:

Table 2: Stratification of Sample

SmallTotal revenues less than $100,000
MediumTotal revenues less than $250,000, but greater than $100,000
LargeTotal revenues greater than $250,000

As reflected in Table 2, the area largely consists of small to mid-sized nonprofit organizations. In fact, only two nonprofits from Athens have earned more than one million in annual gross receipts in the past year. Table 3 highlights resource capacity of local nonprofits. With an average of two or fewer employees, small and mid-sized organizations rely more heavily upon volunteers. Approximately 26.5% of Americans over the age of 16 volunteered through or for an organization between September 2009 and September 2012 (BLS, 2012). Volunteers tend to be college educated and spend the majority of their time on administrative and support activities. Volunteers, board members, and other individuals within the community can have significant influence on the direction of the nonprofit.

Table 3: Average Number of Employees and Volunteers 2010-2012

ResourceSmallMediumLarge
Employees1210
Volunteers4514

While resource inputs (funding sources, volunteers, etc.) vary significantly depending on the size of the organization, budget and spending priorities also differ from entity to entity (see Table 4). While occupancy costs are among the highest expenditures for most nonprofit organizations, small and midsized organizations have a tendency to allocate significant resources towards attending conferences. In fact, the average organization in these two classes spends over 30% of its operating budget on rental and conference related expenses. Likewise, the smaller the organization the more likely a higher percentage of the budget will be allocated towards travel costs. With less institutional capacity, employees of smaller organizations appear to be attempting to enhance their skills by seeking more training and capacity building opportunities.

Meanwhile, larger organizations tend to dedicate a higher percentage of their budget towards professional services, such as auditing, accounting, legal, advertising, and information technology. These investments are likely focused on achieving bureaucratic efficiencies and meeting compliance requirements. Other costs, such as depreciation, capital acquisitions, utilities, etc., represent the highest cost in the budget. Many organizations appear to classify costs to this line-item perhaps too zealously as this line object provides limited transparency. Transparency is an important factor for building and maintaining relationships with donors.

Table 4: Average Annual Expenditures by Object 2010-2012

SmallMediumLarge
ItemExpense%Expense%Expense%
Occupancy$8,26924%$24,92817%$38,7717%
Conferences$5,09215%$21,64315%$1,5410%
Travel$2,2327%$4,5963%$9,3482%
Office$1,5525%$9,4647%$6,8081%
Advertising$9183%$8851%$9,0302%
Accounting$7702%$1,3171%$2,8081%
Information Tech.$00%$5000%$5,2871%
Other Costs$15,27745%$81,67156%$449,33686%
Total Expenses$34,110$145,004$522,929

Table 5 reflects the eleven most common financial ratios used by nonprofits. Our calculations are based on financial account averages for fiscal year 2012. While results are stratified by size, the last column reflects the average for all entities as a whole. Some financial ratios could not be calculated for certain organizations due to missing or inaccurate information. Likewise, applying certain financial ratios to “cash-basis” organizations would be inappropriate and has been omitted. All exceptions have been denoted by an asterisk(s).

The analysis reveals some noteworthy observations. For example, larger organizations have been able to grow their total revenues faster since the end of the recession. Smaller organizations are more dependent on individual donations, membership dues, or governmental grants and have less capacity to recover costs through charges for services. Medium to large organizations tend to be better diversified with respect to their revenue sources. Overall, total revenues have climbed 10% since 2011. This finding is consistent with a national trend of higher individual and foundation donations since the great recession of 2008 (NCCS, 2012).

Furthermore, the efficiency ratios for Athens nonprofits appear favorable. On average, over 84% of entity expenses are used to provide direct services to their client populations (a ratio exceeding 65% is considered exemplary by the Better Business Bureau). For every $1 spent on fundraising activities, these organizations receive $15 in contributions (a ratio exceeding $10 is considered excellent by Charity Navigator). Local nonprofits have effectively controlled personnel costs by maintaining small staffs and relying heavily upon a volunteer labor base.

In examining liquidity and equity measures, nonprofits in the area appear to be taking relatively defensive positions. For example, they are holding low levels of debt and maintain several months of excess cash reserves to cover operating expenses. In several cases, nonprofits were holding few, if any, temporarily restricted net assets. When local donors give money, they generally do not appear to place restrictions on the contribution offering greater flexibility to nonprofit boards. With that said, these metrics are likely skewed due to the inclusion of foundations which hold large cash reserves and related investments. Opportunities may exist among public charities to grow their “rainy day” reserves.

Table 5: Results FY2012

IndicatorSmall EntitiesMid-sizedLarge EntitiesAll
Sample16101046
Revenue sources
Contributions51%42%36%44%
Program Services38%43%60%46%
Other11%15%4%10%
Revenue growth rate-2%16%22%10%
Personnel Cost Ratio47%70%72%60%
Fundraising efficiency*$15$13$18$15
Program Service Cost*81%88%81%84%
Current Ratio**N/A1.61.91.72
Assets to Liabilities**N/A2.13.02.7
Defensive Indicator16141014
Conversion Account Indicator*3454
Debt to Assets**7%4%12%10%
Net Asset Total1.11.31.91.4
Temp. Res. Net Assets***N/A.82.69.73

* Excludes organizations filing form 990-EZ due to insufficient detail.
**Excludes organizations preparing financials on a cash basis.
***Only organizations with temporarily restricted assets were analyzed.

Conclusion

An analysis of financial trends and ratios suggests that nonprofit organizations based in Athens, AL weathered the most recent economic recession very well. The combination of federal stimulus funding and restored donation levels post-crisis enabled many organizations to sustain operations with minimal service disruption. Our research findings suggest that unique opportunities and challenges await different organizations. Organizational size does appear to be correlated with stronger financial health in that larger organizations appear better diversified.

Recommendations

While nonprofit financial performance appears stable, organizations must continue to reduce debt, increase their rainy day funds, and diversify/increase their revenue sources. During this process, efforts should be undertaken to control costs. One important strategy towards achieving this end would be to professionalize accounting operations. During our review of Form 990s, we identified discrepancies in nearly 30% of all returns filed. Additionally, we found that less than half of the organizations had adopted basic accounting best practices, such as adoption of accrual accounting, use of an independent auditor, or creation of an audit committee.

Figure 2: Adoption of Accounting Best Practices

 

 

 

 

 

 

Source: Form 990, Part XII

One of the most effective ways for organizations to ensure accurate financial reports and prevent fraud is to adopt accrual accounting, which reflects the most realistic economic picture of an entity. Engaging an independent CPA to confirm the integrity of financial statements prepared in accordance with GAAP builds confidence among key stakeholders: leaders, donors, lending institutions, and government agencies. Adopting accrual accounting and appointing an independent auditor enhances internal controls. COSO (2011) defines internal control as a process affected by those charged with governance, management, and other personnel – designed to provide reasonable assurance about the achievement of entity’s objectives with regard to 1) reliability of financial reporting, 2) effectiveness and efficiency of operations, and 3) compliance with applicable laws and regulations (p. 1).

Establishing an audit committee to coordinate audits, review results, and accept whistleblower tips is yet another way to boost internal controls. When building an audit committee, the organization should focus on picking the right board members for the role. Try to strike the right balance between specialized knowledge and effective leaders. For example, a Certified Public Accountant could provide advice on budgeting, accounting, and treasury operations and an attorney could provide useful information relating to confidentiality, conflict resolution, and risk management concerns. In addition to finding technical resources, it behooves an organization to find prominent, respected, or well-identified people within the community to sell the services of the organization. At the end of the day, this leadership team should be well positioned to search out challenging opportunities to change, grow, innovate, and improve the organization. Under increased budgetary constraints, governments will increasingly rely upon nonprofits to provide vital services. When filling this gap, nonprofits should be focused on preserving confidence through self-regulation and public accountability controls.

Future Research

As economic conditions are constantly in flux, on-going monitoring of the fiscal health of nonprofits within the Athens community is advisable. Athens State University should consider developing a database of financial metrics to expedite analysis in the future. Alternatively, consideration could be given to subscribing to an outside service provider. Charity Navigator, as one example, runs ratios based on statements from the last seven years and assigns overall efficiency and performance scores, in a rating of 1-5 stars, for donors to compare nonprofits at a quick glance. Additional analysis of financial trends by service activity would enhance the robustness of research findings. Expanding the study into the broader northern Alabama region, such as Decatur, Florence, and Huntsville, would enhance benchmarking activities.

Since non-profits tend to be smaller organizations and try to spend every dollar possible on providing direct services, they are more vulnerable to occupational fraud. According to the ACFE (2010), nonprofits lost as much as 5% of their annual revenue to fraud. Small organizations are disproportionately victimized due to weaker internal controls or failure to target resources towards effective controls. Given this reality, case studies could be performed into fraudulent activities in the local nonprofit community, such as the recent incident involving management at the Habitat for Humanity (Holmes, 2014). Another area of research could be in the arena of developing effective planned giving strategies. As a final note, our study found that information technology investments are low in smaller voluntary organizations. Technology is fundamentally changing the way that nonprofits operate and communicate with their stakeholders. In order to allow small nonprofits to flourish, additional research should be performed into technology best practices to stay ahead of the curve on emerging technologies and tools.

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Authors

zenderDr. Joshua Zender is an Assistant Professor of Accounting at Athens State University and specializes in government and management accounting. Prior to joining Athens State, he served as faculty at Central Washington University and Auburn University. He has also worked in a financial management role for several local governments in Alabama, California, New York, and Washington. Within the State of Alabama, Dr. Zender performed program evaluations and authored technical guidebooks for State agencies. He holds a Ph.D. from Auburn University, a MPA from the University of Illinois, and a B.B.A. from Gonzaga University. He is currently licensed as a CPA, CIA, CGFM, CGAP, CITP, and CGMA.

gilmanKatie S. Gilman is a senior at Athens State University pursuing a degree in Accounting with an anticipated graduation date of Spring 2015. She holds a BS in Business Administration from University of Phoenix and an AA in Business Administration from El Paso Community College. She is a member of the Institute of Management Accountants Honor Society and the Alpha Iota Chapter of Delta Mu Delta International Society of Business. She is also a member of the ASU Accounting Club and holds student membership in the Institute of Management Accountants. Katie enjoys spending time with her family, volunteering with James Clemens High School Band, attending fine art events, the Boston Red Sox, and Oregon Ducks football.

durginTraci Durgin is finalizing her fifth year requirements at Athens State University with the objective of obtaining a CPA, whereby she projects to finish her studies by December, 2015. She holds a B.B.A. with a concentration in Accounting obtained from Anderson School of Management at the University of New Mexico. Traci oversaw personnel and strategic planning activities while serving in the U.S. Air Force as well as during her employment with Intel, the Biology Department of the University of New Mexico, and various non-profit entities. She is a member of the ASU Accounting Club and the Institute of Management Accountants. Traci enjoys volunteering her time and talents to Huntsville School of Ballet, supporting the arts in her local schools, gardening, and traveling.