A Methodology for Measuring the Financial Vulnerability of Charitable Nonprofit Organizations

Abstract

This article defines a charitable nonprofit organization as financially vulnerable if it is likely to cut service offerings immediately when a financial shock occurs. It discusses why the vulnerability of the nonprofit sector is of interest to researchers, explores the destabilizing role of third-party finance, considers the reasons for the lack of research on vulnerability, and presents a conceptual framework for identifying finan cially vulnerable nonprofits. Four vulnerability criteria are defined and applied to a 1983 national sample of tax returns filed by 4,730 U.S. charitable nonprofits. The financial data of at-risk organizations are then analyzed to discern the characteristics of vulnerable and other nonprofit organizations.

Are the Wealthy Also Healthy? An Empirical Evaluation of the Financial Health of Chinese Foundations

“…A nonprofit with a higher operating margin has a greater potential surplus on which to draw during financial difficulties (Tuckman & Chang, 1991). Such nonprofits have an option to operate with a reduced operating margin rather than reduce their funding for services.…”

“…Organizations with multiple revenue sources are more likely to survive financial shocks than those with few revenue sources (Greenlee & Trussel, 2000). Tuckman and Chang (1991) defined revenue diversification in terms of revenue concentration-a sum of squared percentage share that each revenue source takes of the total revenue. The higher level of revenue concentration is positively associated with nonprofit financial vulnerability.…”

“…Since then accounting ratios have been widely used in the corporate realm as health indicators (e.g., Ohlson, 1980). Recognizing the dearth of such research in the nonprofit sector, Tuckman and Chang (1991) conceptualized a model of four ratios to measure nonprofits' financial vulnerability: adequacy of equity, revenue concentration, administrative cost ratio, and operating margin. They ranked the nonprofits that fell in the lowest quintile for all four measures as being severely at risk of becoming financially vulnerable; they ranked those with only one of the four measures in the bottom quintile as being at risk of becoming financially vulnerable.…”

“…In order to address this question, we employed the widely recognized nonprofit financial vulnerability model proposed by Tuckman and Chang (1991). They defined a nonprofit as financially vulnerable "if it is likely to cut back its service offerings immediately when it experiences a financial shock."…”

The Relationship of Annual Giving and Endowment Payout to Future Tuition Dependency at Private Master's Universities

“…Tuckman and Chang developed a model using quintiles to rank organizations in order of financial vulnerability. 12 In this model an organization was defined as financially vulnerable if it is likely to cut back its service offerings when it experienced a financial shock. They identified four indicators that signaled a tendency toward financial vulnerability:…”