What happens when nonprofits that provide vital services suddenly aren’t there anymore? A new report by Oliver Wyman, SeaChange Capital Partners, and GuideStar reveals what could happen in Philadelphia.
“The Financial Health of Philadelphia-Area Nonprofits” analyzes FY 2010-2014 data for more than 3,000 organizations in the Greater Philadelphia region. The study focuses on 501(c)(3) nonprofits that provide direct services. It excludes educational institutions and hospitals because of their different business model.
The conclusions are sobering:
- Some 7 percent of Greater Philadelphia nonprofits were technically insolvent in 2014.
Liabilities exceeded assets for these organizations. The report notes, “Many of these organizations are limping from payroll to payroll with less than a month of cash, effectively borrowing from vendors (by delaying payment) and/or dipping into restricted funds.” Further, these nonprofits “have no capital for investment and no ability to consider a thoughtful wind-down given the lack of resources to fund the associated one-time costs.”
Insolvency rates did vary by mission. Environmental and animal-related nonprofits were in the best shape, with only 2 percent falling into the technically insolvent category. Health and human service agencies were the most vulnerable, with 13 percent technically insolvent. When broken down by budget size, insolvency rates for health and human service nonprofits ranged from 11 percent (for organizations in the $10 to $50 million range) to 19 percent ($5 to $10 million).
- More than one-fifth of the area’s nonprofits have less than one month of cash reserves.
The report observes, “Even this actually overstates the real cushion for weaker organizations, since much of the available cash is restricted to certain purposes.”
- Four out of 10 Philadelphia nonprofits have net operating margins of 0 or less.
They are operating either at a loss or at a break-even point.
- Even a small decrease in government funding could put one-fifth of the area’s nonprofits at risk.
Spread across all Greater Philadelphia organizations, a 5 percent cut in government funding would move 20 percent of nonprofits from the surplus to the deficit category. Some 20 percent of those nonprofits—or 4 percent of the region’s nonprofits overall—would be insolvent within five years. Again, health and human service organizations are especially vulnerable, as these organizations receive a substantial portion of their incomes from government contracts.
There is some good news: the positive net income margin in 2014 was 11 percent, compared to 3 percent in 2010.
So What Does All This Mean?
A sudden financial setback could drive a significant number of Greater Philadelphia nonprofits out of business. It could happen very quickly, leaving the people who depend on these organizations’ services in the lurch—and probably causing a mad scramble among the remaining nonprofits to fill the gap.
The risk isn’t confined to Philadelphia. A March 2016 Wyman/SeaChange/GuideStar report found equally troubling figures for New York City nonprofits:
- Some 10 percent were insolvent in FY 2013. That number rose to 18 percent for health and human services providers.
- As many as 40 percent had no cash reserves.
- More than 40 percent had lost money over the previous three years.
What You Can Do
The report offers several strategies nonprofits can adopt to manage their financial health and reduce financial risk. It advises starting with these three steps:
- Look at these regional data with your own organization in mind. Where does your organization fit among your peers? Awareness is the first step toward action.
- Make every effort to adopt the risk management practices and develop the associated capabilities recommended in this report.
- Be prepared to face into the reality that stronger risk management still does not guarantee survival. But knowledge is power. Knowledge may lead your organization to explore—in a timely and directive manner—consolidation, mergers and acquisitions, divestments, and orderly wind-downs as a normal part of a vibrant nonprofit sector, just as they are in the for-profit sector.
To learn more, download your free copies of “The Financial Health of Philadelphia-Area Nonprofits” and the New York City report, “Risk Management for Nonprofits.”Suzanne Coffman is GuideStar’s editorial director.