Signs Which May Indicate Financial Trouble For Nonprofit Organizations

Community Support

  • Decline in utilization of organization’s services by the local community (fewer students, patients, visitors, members or other users)
  • Decline in real dollar (inflation-adjusted) support through gifts, bequests and membership dues
  • Decline in hours of time made available by volunteers
  • Increasing incidence of turndown of grant requests
  • Criticism of the organization or its programs by public figures or media

Financial Independence

  • A growing percentage of expenditures for basic operations funded by restricted grants
  • A growing percentage of unrestricted revenues committed to meet matching-fund requirements or needed to supplement restricted revenues for special projects
  • Increasing use of “next year’s” cash to pay this year’s expenses, e.g., prepaid dues, ticket sales, tuition, etc.
  • Increasing reliance on very few different sources of support
  • A growing debt burden
  • Rapid increases in fixed or semi-fixed cash costs (salaries and fringes, rent, debt service, etc.)
  • Continuing decline or deficit in operating income or unrestricted net assets
  • Continuing decline or, especially, overdraft in cash and equivalents


  • Cost per unit of service rising disproportionately to inflation
  • Number of employees per unit of service rising rapidly
  • User fee rates rising rapidly (unless resulting from a deliberate management decision to reduce the amount by which such fees are subsidized from other revenue sources

Deferred Current Costs

  • Proceeds of long-term debt or sales of long-term investments being used for current purposes
  • Deferring needed maintenance and/or replacement of capital assets
  • Default on debts (bonds, notes, mortgages, interest)
  • Inability to pay salaries or other current expenses – especially payroll or other taxes – when due, or borrowing to cover such amounts shortly before payment
  • Borrowing of cash or other assets from restricted funds or other diversion of restricted resources to inappropriate purposes

Management Practices

  • A pattern of budget cost overruns, either overall or in specific programs/departments
  • Increasing incidence of revenue shortfalls
  • Earnings on investments declining disproportionately to general trends of investment yields
  • Interest rates charged by lenders increasing disproportionately, unwillingness of lenders to lend to organization or insistence by lenders on burdensome debt covenants
  • Levels of receivables, inventory, or prepaid expenses increasing faster than related activity
  • Increasing incidence of funding source challenge or disallowance of expenses
  • Financial and operating data being provided to board members and management is delayed, unclear or incomplete. Explanations of key items and variances are unavailable or of doubtful validity
  • Failure on the part of board members or management to understand and accept the seriousness of the financial situation

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