A new survey of mid-sized nonprofits with revenues ranging between $1 million and $5 million found that they lag in financial knowledge and cash reserves.
While 76 percent of the respondents said that they were financially literate, only a third were correct when quizzed on their financial knowledge, according to a report released Wednesday by the Center on Philanthropy at Indiana University.
“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.”
Respondents were asked three questions covering bond prices and interest rates, investment risk and diversification.
According to the study, financial literacy increased in conjunction with the organization’s budget. In other words, nearly 45 percent of nonprofits answered all three questions, compared to just over 26 percent of non-profits with budgets less than $5 million.
Men who participated in the survey were statistically more likely than women to answer all three questions correctly, according to the report.
Almost half of mid-sized nonprofits surveyed had less than three months’ worth of operating expenses available for times when they spent more than they brought in. A quarter of the nonprofits said they had four to six months of reserves on hand.
The findings come at a time when many nonprofits are facing greater demand for their services in the community, and as a result, greater strain on their budgets.
With tough economic times, nonprofits’ financial priorities have shifted, according to Osili. Breaking even was the goal in previous years, but now, more organizations are putting a greater emphasis on long-term financial planning and sustainability.
“There are strengths in these nonprofits’ financial knowledge and management, but there’s room for improvement,” she said.
With increased financial training for nonprofit boards and staff, recruiting experienced finance professionals to serve on boards, and using audit committees and financial indicators, nonprofits can improve their financial planning and performance, according to Osili.
The survey was conducted to help nonprofits understand and increase their financial knowledge. “Most people get into the nonprofit sector because they are passionate about a cause, not because they have accounting or financial experience,” said Osili. “If the nonprofit doesn’t have the resources to bring in that expertise, there will be a gap,” she said.
More than 500 non profit employees responsible for their organization’s overall financial management were surveyed, working in the areas of human services, health, civic, environment, arts and education. Hospitals and institutions of higher education were not included.
“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,” said Patrick M. Rooney, executive director of the Center on Philanthropy.