Assessing the Financial Reserves of Social Service Charities Involved in Public Service Delivery

Abstract

Delivering services in partnership with government is commonly considered a source of financial stability for charities and other nonprofits. However, in liberal welfare states, government funding may also heighten financial risks, where it exposes charities to competition, austerity, and rising service demand. In these contexts, publicly funded charities’ capacity to withstand financial shock is an important consideration in implementing sustainable government programs. To deepen knowledge about the factors contributing to financial capacity among charities receiving government funding, this article analyzes the financial reserves of 4,542 Australian charities engaged by government to deliver social welfare services. Logistic regression shows how younger charities, larger charities, and those with high dependence on government funding have lower odds of holding adequate reserves, indicating poorer short-term financial capacity. The findings draw attention to potential risks associated with outsourced government service delivery, while highlighting which charities most need to strengthen their financial capacity.

Research note: Bridging the gaps between the theory and practice of nonprofit operating reserves

“…In other words, whether we use the self‐reported measure or the book value, we reach the same conclusions. The main findings in our results are consistent with those in previous studies of nonprofit rainy‐day funds (Calabrese, 2013; Cortis & Lee, 2019; Grizzle et al, 2015); that is, leveraged nonprofits are more likely to be vulnerable in the event of loss of funds, and larger organizations are likely to have larger reserves.…”

“…In addition, a high leverage ratio (total assets divided by total liabilities) and high donation amount (while controlling for an organization's size by total assets) are negatively associated with the level of operating reserves (Grizzle et al, 2015; Ramirez, 2011). Cortis and Lee (2019) found that Australian nonprofits that are younger (age), larger (size), and more heavily government‐funded (funding source) are less likely to hold a high level of operating reserves. Others have found that having more profits generated from program fees and having greater operating margins are both linked to larger operating reserves (Grizzle et al, 2015; Lin & Wang, 2016).…”

“…Grizzle et al (2015) also used the Digitized Data, and their mean and median values were similar to the findings in Calabrese (2013). Cortis and Lee (2019) converted a LUNA‐type variable to months, but it was not feasible to directly compare the values since they used data from nonprofits in Australia. The Washington‐Area nonprofit study (Blackwood & Pollak, 2009) found a median operating reserve of 2.1 months in 2006.…”

Surviving the Black Swan Event: How Much Reserves Should Nonprofit Organizations Hold?

“…The larger NPOs are often older and have more net assets, so this recommendation of 25% of annual expenses held in reserves may be quite easily met. Researchers have expressed surprise that larger organizations sometimes have low reserves (Blackwood & Pollak, 2009;Cortis & Lee, 2019), but given the stability of their revenue over time, it is appropriate that large nonprofits hold less reserves as a percentage of annual expenditures, compared with small organizations. 4) with between AUD$250,000 and $999,999 in annual revenue were found to need 3 months' worth of reserves, on average, to maintain programming in the event of a fiscal shock occurring with a 10% probability.…”

“…Some fixed assets could be sold in a financial crisis, but nonprofit ownership of fixed assets is not usually speculative, and selling an asset may imply a reduction in programming, such as a museum selling its exhibit space. Ramirez (2011), Ryan and Irvine (2012), and Cortis and Lee (2019) measure reserves in terms of cash only. We favor a definition of “months of reserves” that excludes restricted and fixed net assets and includes only funds that would be accessible in times of financial distress; that is:…”