Thank you to ACPNS alumnus, Dr Mike Booth for this article.
Mike is a Sessional Academic in the QUT Business School, a past lecturer at ACPNS and past ACPNS Alumni Chapter member. His thesis on financial sustainability is available via eprints.
Booth, Michael S. (2017) An accountability framework for the financial sustainability of Australian international development organisations. PhD thesis, Queensland University of Technology.
What keeps you awake at night?
Research in the Australian nonprofit sector has consistently identified the financial sustainability of NPOs as a core source of insomnia! Directors and NPO staff have described their organisations and others in the sector as operating in a constant state of financial stress with around half in a 2017 AICD survey reporting levels of profit (surplus) less than that required for long term viability. These concerns are exacerbated as the NPOs which the Directors govern primarily rely on funding from either government or donors in an environment of ongoing uncertainty. In addition they cannot readily access sources of finance available to other businesses, such as equity markets and financial institutions.
A yet further layer of complexity, and potential sleep deprivation is that directors and others operate with a fear of scrutiny and associated public criticism of the relative costs of overheads and income-raising. This concern exists even where those costs directly increase financial sustainability such as investments in staff training or information technology support. Directors and others comment that making significant profit or being successful may in fact lead to reductions in donations as a result of not being sufficiently ‘in need’.
The complexities faced by an NPO seeking to ensure its financial sustainability are manyfold.
- While the goal to be financially sustainable seems clear, for example to keep operating over time, key characteristics such as the need to hedge uncertainty, consider the time value of money or address questions of ongoing product delivery and quality are often not considered.
- While for-profit firms can be criticised for accumulating profits that are not distributed to shareholders (even where surpluses may be needed for sustainability such as the need to reduce divdends to retain a credit rating) NPOs face a parallel reality in that they can be censured for being seen to be hoarding funds which should be spent on their mission.
- While arguably the market ensures the efficiency of for-profit organisations, in the absence of market mechanisms, which work through pricing, societal pressures in the NPO sector, operate through the publishing of relative ratings or media ‘exposé’. These regimes and associated societal pressure can be dysfunctional, notwithstanding sector and academic attempts to contextualise them. Indeed this vehicle as a pursuit of financial efficiency may lead to a self-reinforcing loop of cost-cutting (a starvation cycle) resulting in reductions in internal investment, staff burnout and reductions in services potentially jeopardising an organisation’s ability to be financially sustainable over time.
So what is financial sustainability? How is it described and understood? How do we know if we are on the correct path to achieve it?
Surprisingly there is no agreed definition of financial sustainability which can be applied to Australian NPOs. While its meaning may appear obvious; to continue to operate in the long term, how does that help us to inform strategy? We clearly need to maintain a surplus of income over expenditure over time but how do we understand that. Is the minimum level of surplus the long term inflation rate? What do we do about asset replacement? Do we need to maintain quality/quantity of services? Of further interest is that while accountability for the immediate financial health of NPOs is highly formalised by law, there are no similar accountabilities for their longer-term financial sustainability.
So what might we do? Some thoughts:
- Discuss financial sustainability at the Board and CEO level to reach an agreed understanding of its meaning in your organisations’ context, why it is different from solvency and how it can be informed by the planning cycle.
- Many consider financial sustainability as simply ensuring sufficient reserves or net assets are held by the organisation. I contend that it is more than that. In the event, both overseas (British) and locally, organisations often do not conform to reserves’ disclosure requirements outlined by regulatory bodies.
- Financial sustainability is a time bound concept – it needs to be considered over time so it should be reported over time
- There are both traditional and NPO specific metrics which may be considered for diagnostic and reporting purposes. These include measures of efficiency, capacity, stability, and viability/sustainability. Not all of these will be relevant or useful to your organisation however a subset will be.
Thanks for reading! Did you know that ACPNS offer courses for staff, board and other volunteer professionals who work, or are entering the philanthropy, nonprofit or social enterprise sectors? In fact one of the units deals specifically with accounting and finance.
Philanthropic and Nonprofit Frameworks of Governance
The unit explores contemporary understandings of philanthropic and nonprofit governance in the context of social, economic and political systems. It locates these understandings in various theoretical and descriptive frameworks providing students with both the knowledge and analytical skills that are necessary to reflect critically on philanthropy and nonprofit governance systems and their environments.
Check out our Study with us page for more info or call to request a free course information pack. +61 7 3138 1020. Please get in touch, this could be your best career move yet!
Read more of the Developing Your Organisation series
Three Ways Nonprofit Boards Can Improve Its Team by Dr Ruth Knight
Three Key Questions to Ask Before Starting a Social Enterprise by Dr Craig Furneaux