Spenders or Savers? An Examination of the Reserves of Australian NGOs

Abstract

Not -for-profit (NFP) organisations experience a tension between societal perceptions about maximising mission expenditure on one hand, and their need to accumulate reserves to ensure longer term financial sustainability on the other. While studies have examined the level of reserves in UK and US contexts, there is little Australian research or guidance about what constitutes an appropriate level of NFP reserves. This paper examines the levels and implications of the reserves of 52 Australian NFP non-governmental organisations (NGOs) over eight years, identifying two groups. Spenders, with less than three months of expenditure in reserve, were more financially vulnerable, had higher levels of debt, yet spent a relatively greater proportion of their revenue on mission-related activities than savers. Savers, with more than three months' reserves, demonstrated a greater proportion of revenue from fundraising, proportionately greater equity levels, and higher returns on assets. Providing unique insights into the financial reserves of Australian NGOs, this empirical study contributes to existing NFP literature on reserves, which to date has focused primarily on US and UK contexts. Further, we propose that by developing, monitoring and communicating their reserves' strategies, NFP boards and managers will be able to improve their organisations' financial sustainability and manage societal perceptions about reserves.

The financial health of Australian universities: policy implications in a changing environment

“…These trends are consistent with a NFP environment, where organisations seek to develop multiple sources of revenue in order to decrease their risk of financial vulnerability (Booth et al , 2017; Thomas and Trafford, 2013). Universities, operating in a NPM environment, face public funding challenges, and consequently are developing a “self-generating profit oriented [higher education] business model” (Parker, 2012, p. 247).…”

“…It is therefore an important component in assessing universities’ financial health, with the caution that “long-term borrowing should be reserved for expanding the organization’s ability to increase its revenues” (Bowman, 2007). There is general acknowledgement that the greater the dependence on interest-bearing debt, the more financially vulnerable an organisation is (Booth et al , 2017).…”

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

“…This may seem counterintuitive given dominant scholarly framings of public funding as a stable and sustainable option for charities (Froelich, 1999). However, other research has similarly found Australian nonprofits which depend on government grants tend to have lower average reserves (Booth et al, 2017).…”

“…As indicated above, studies of the financial status of nonprofit organizations have expanded since Tuckman and Chang’s (1991) seminal application of financial vulnerability measures, conceptualizing financial health in a range of ways. Financial status has been explored in terms of revenue stability, volatility, and growth; decrease in assets over time; failure and organizational demise; and accumulation of operating reserves (Booth et al, 2017; Calabrese, 2012; Chikoto & Neely, 2013; Chikoto-Schultz & Neely, 2016; Tevel, Katz, & Brock, 2015; Trussel & Greenlee, 2004). Studies have also identified an increasing range of variables which may affect financial status, with industry or activity type, along with organizational age, consistently considered key.…”

“…Australian charity guidance does not specify a reserve level but rather suggests charities should accumulate reserves at levels appropriate to their circumstance and recommends the development of policies for drawing on reserves which are consistent with purpose (ACNC, 2016). In the absence of local guidance to specify particular thresholds, and following others who have found 3 months a helpful threshold for scholarly analysis of short-term financial reserves (see, for example, Booth, Irvine, Ryan, & McGregor-Lowndes, 2017; Sloan, Charles, & Kim, 2016), we analyze Australian charities against the NORI standard. As well as highlighting substantial risk across the service system, regression analysis helps to highlight the types of charities likely to experience financial difficulties in times of financial shock, and those which would benefit from initiatives to support charities’ financial health and fortify them against the possible shock of funding loss.…”