Useful publications to help nonprofit organizations make better use of their resources can be found in diverse places these days – including new books, and articles in research and trade journals. Here is a sample from each of these venues.
Managing Risk in Nonprofit Organizations addresses a very important topic for nonprofits in today’s changing and uncertain economic environment. The authors define risk as “...a measure of the possibility that the future may be surprisingly different from what we expect.” The book is excellent on key dimensions of risk management. It identifies the various categories of assets for which a nonprofit can experience unexpected loss or damage: people, property, income and reputation. It does a commendable job of identifying the sources and types of potential losses within each of these categories, and the processes and strategies an organization can use to assess these risks and gain protection from them. The authors correctly realize that risks are to be properly managed and not simply minimized: “A nonprofit takes risks in order to achieve positive or beneficial outcomes.” And they emphasize the notion of “risk tolerance” as a way of determining how much risk an organization is willing to bear. What seems to be missing from the book, however, is a way for nonprofits to explicitly address the inevitable trade-offs between risk and reward, not only on the financial front but with respect to programming, new ventures and other areas of strategic decision making. Another, more surprising lacuna is the absence of any discussion of the strategy of diversification as an approach to risk management. But perhaps these issues call for another book. This one is chock full of very practical information for sensible day to day management practices that should serve nonprofit managers very well in a wide range of contexts.
Nonprofit Management and Leadership (NML) is an excellent research journal which occasionally publishes useful articles on the economic stewardship of nonprofit organizations. (Disclosure: this author is the founding editor of NML and continues to advise the editorial board. NML may be accessed through the web site of Jossey-Bass Publishers, www.josseybass.com). The article by Ritchie and Kolodinsky in the recent summer issue is a good example. It reports the results of analyzing a variety of financial ratios found in the literature or suggested by foundation officials, which are intended for use in assessing the financial performance of a nonprofit organization. The study is confined to university foundations, but the underlying concepts that the authors discover in these various measures appear to be general in their applicability: fund raising efficiency – comparing dollars raised with dollars spent on fund raising; public support – reflecting an organization’s ability to raise revenues; and fiscal performance – gauging an organization’s ability to cover expenditures with revenues. This research helps crystallize the principal concerns that nonprofits have when they employ various measures to assess their performance. However, as the authors indicate, research to date is limited in its ability to inform practitioners on the interpretation of such measures in specific circumstances. What is missing is a set peer groups comparisons that will allow nonprofits to gauge their performance relative to other organizations in similar fields of service, of similar size, in similar geographic areas or political jurisdictions, in similar stages of organizational development, and so on. Still, readers may find the information in this article useful in deciding what ratios to apply within their own organizational contexts.
Finally, The Nonprofit Quarterly, a lively and explicitly practitioner-focused magazine that draws on research and experience in practice, has recently published a helpful special issue on nonprofit finance. The article by Clara Miller, President of the Nonprofit Finance Fund, is especially well done. It focuses on a nonprofit organization’s capital structure, i.e., the distribution of its assets and liabilities. The thesis of the article is that a nonprofit’s capital structure should reflect the nature of its “core business” (how it earns its money), and that an appropriate capital structure is critical to its financial health and its ability to effectively address its mission. For example, capital structure affects the level of an organization’s operating costs (e.g., if it includes buildings and equipment that are costly to maintain), its ability to successfully manage its cash flow (e.g., if assets are not sufficiently liquid to meet payment schedules), and its ability to grow over time (e.g., if sufficient working capital is lacking). So many nonprofits are undercapitalized or hampered in their development by assets that tie their hands rather than support their initiatives. This article, and other papers found on the website of the Nonprofit Finance Fund (www.nonprofitfinancefund.org) provides a helpful way of thinking about these issues