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Assessing Financial Vulnerability in the Nonprofit Sector

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  • Keating, Elizabeth K.

    (Harvard U)

  • Fischer, Mary

    (U of Texas, Tyler)

  • Gordon, Teresa P.

    (U of Idaho)

  • Greenlee, Janet

    (U of Dayton)

Abstract

Effective nonprofit governance relies upon understanding an organization’s financial condition and vulnerabilities. However, financial vulnerability of nonprofit organizations is a relatively new area of study. In this paper, we compare two models used to forecast bankruptcy in the corporate sector (Altman 1968 and Ohlson 1980) with the model used by nonprofit researchers (Tuckman and Chang 1991). We find that the Ohlson model has higher explanatory power than either Tuckman and Chang’s or Altman’s in predicting four different measures of financial vulnerability. However, we show that none of the models, individually or combined, are effective in predicting financial distress. We then propose a more comprehensive model of financial vulnerability by adding two new variables to represent reliance on commercial-type activities to generate revenues and endowment sufficiency. We find that this model outperforms Ohlson’s model and performs substantially better in explaining and predicting financial vulnerability. Hence, the expanded model can be used as a guide for understanding the drivers of financial vulnerability and for identifying more effective proxies for nonprofit sector financial distress for use in future research.

Suggested Citation

  • Keating, Elizabeth K. & Fischer, Mary & Gordon, Teresa P. & Greenlee, Janet, 2005. "Assessing Financial Vulnerability in the Nonprofit Sector," Working Paper Series rwp05-002, Harvard University, John F. Kennedy School of Government.
    • Handle: RePEc:ecl:harjfk:rwp05-002
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    References listed on IDEAS

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    Cited by:

    1. Qian Hu & Naim Kapucu, 2017. "Can Management Practices Make a Difference? Nonprofit Organization Financial Performance during Times of Economic Stress," Journal of Economics and Financial Analysis, Tripal Publishing House, vol. 1(2), pages 71-88.
    2. Kim, Soo Y. & Upneja, Arun, 2014. "Predicting restaurant financial distress using decision tree and AdaBoosted decision tree models," Economic Modelling, Elsevier, vol. 36(C), pages 354-362.
    3. Juan Alejandro Gallegos Mardones & Jorge Andrés Moraga Palacios, 2023. "Chilean Universities and Universal Gratuity: Suggestions for a Model to Evaluate the Effects on Financial Vulnerability," Sustainability, MDPI, vol. 15(13), pages 1-21, June.
    4. Cordery, Carolyn J. & Sim, Dalice & Baskerville, Rachel F., 2013. "Three models, one goal: Assessing financial vulnerability in New Zealand amateur sports clubs," Sport Management Review, Elsevier, vol. 16(2), pages 186-199.
    5. Raghavan, Sunder & Yu, Chunyan, 2021. "Evaluating financial performance of commercial service airports in the United States," Journal of Air Transport Management, Elsevier, vol. 96(C).
    6. Scott Dell & Meena Subedi & Maxwell K. Hsu & Ali Farazmand, 2022. "Social Capital and Financial Performance in Nonprofits," Public Organization Review, Springer, vol. 22(1), pages 193-210, March.
    7. Canh Thien Dang & Trudy Owens, 2017. "What motivates Ugandan NGOs to diversify: Risk reduction or private gain?," Discussion Papers 2017-11, University of Nottingham, CREDIT.
    8. Berta SILVA & Ronelle BURGER, 2015. "Financial vulnerability: an empirical study of Ugandan NGOs," CIRIEC Working Papers 1515, CIRIEC - Université de Liège.
    9. Pamela Wicker & Svenja Feiler & Christoph Breuer, 2013. "Organizational Mission and Revenue Diversification among Non-profit Sports Clubs," IJFS, MDPI, vol. 1(4), pages 1-18, November.
    10. Soo Y. Kim, 2008. "Prediction of hotel bankruptcy using support vector machine, artificial neural network, logistic regression, and multivariate discriminant analysis," The Service Industries Journal, Taylor & Francis Journals, vol. 31(3), pages 441-468, December.
    11. Jaroslav Mazanec & Viera Bartosova & Patrik Bohm, 2022. "Logit Model for Estimating Non-Profit Organizations’ Financial Status as a Part of Non-Profit Financial Management," Mathematics, MDPI, vol. 10(13), pages 1-18, June.
    12. Sebastian Ion Ceptureanu & Eduard Gabriel Ceptureanu, 2019. "Community-Based Healthcare Programs Sustainability Impact on the Sustainability of Host Organizations: A Structural Equation Modeling Analysis," IJERPH, MDPI, vol. 16(20), pages 1-18, October.
    13. Saffet A. Uygur & Christopher J. Napier, 2024. "Understanding Fraud in the Not-For-Profit Sector: A Stakeholder Perspective for Charities," Journal of Business Ethics, Springer, vol. 190(3), pages 569-588, March.
    14. Ghosh Moulick, Abhisekh & Alexiou, Kostas & Dowin Kennedy, Elena & Parris, Denise Linda, 2020. "A total eclipse of the heart: compensation strategies in entrepreneurial nonprofits," Journal of Business Venturing, Elsevier, vol. 35(4).
    15. Sebastian-Ion Ceptureanu & Eduard-Gabriel Ceptureanu & Mihai Cristian Orzan & Irinel Marin, 2017. "Toward a Romanian NPOs Sustainability Model: Determinants of Sustainability," Sustainability, MDPI, vol. 9(6), pages 1-26, June.
    16. Elizabeth A. M. Searing, 2021. "Resilience in Vulnerable Small and New Social Enterprises," Sustainability, MDPI, vol. 13(24), pages 1-21, December.

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