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

Productivity

• 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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