FACTORS AFFECTING FINANCIAL SUSTAINABILITY
There are three major factors related to the financial sustainability of a nonprofit organization (Figure 2.1):
1. The inherent factors
2. The collateral factors
3. The environmental factors
The inherent factors are directly linked to financial sustainability. They determine whether an organization is financially sustainable or not. Inherent factors of financial sustainability include, but are not limited to:
- Financial management
FIGURE 2.1 Factors affecting financial sustainability.
Financial statement analysis Financial sustainability plan Social enterprise
- Grant seeking
Roseland Community Hospital of Chicago provides an interesting illustration of the impact of financial management on the financial sustainability of a nonprofit organization. Roseland is a 162-bed community hospital that provides health care services to 28,000 people per year, mostly poor patients without health insurance coverage. Thomas (2013) reported that Roseland was on the brink of closing, partly because of $7 million of debt that was more than 90 days delinquent, but also because of poor financial management decisions. For example, Thomas (2013) explained that management used its operations money to build an adolescent behavioral health unit, which could have waited until the hospital received $7 million in funding from the state of Illinois, which eventually materialized. There is nothing wrong with building an adolescent behavioral health unit. The building project may be in response to a need identified by the agency. However, if building that new unit will jeopardize the entire agency, it is very unwise to build it. Regardless of the justification, this was not an effective financial management decision. Effective financial management enables a nonprofit organization to continue to provide services to clients within the limits of its capacities. Ineffective financial management will lead to the opposite, which is an organization that is unable to fulfill its mission and is forced to stop core services or even close its doors. Sound financial management can help a nonprofit organization anticipate and mitigate risks, reduce costs, build reserves, and put financing strategies in place in order to continue to provide core services, even if external donors withdraw their funding.
The budget allows nonprofit organizations to anticipate sources of revenue, make proper appropriation of funds, plan for contingencies, and monitor expenses to ensure that they are being executed according to plan. The budget is one the best financial tools available to shape the path of nonprofit organizations toward financial sustainability. The budgeting process, which includes forecasting, provides clarity about what the financial future may look like. This puts an organization in a better position to make decisions in advance to meet challenges that could constitute an existential threat to an organization.
FINANCIAL STATEMENT ANALYSIS
Financial statement analysis is an effective tool used to understand the financial health and conditions of an organization in relation to its financial strengths and weaknesses. It helps assess financial management effectiveness and make judgments about whether the organization is financially sustainable, on a path to financial sustainability, or near a crisis of financial sustainability. Findings from financial statement analysis can be used for strategic planning, budgeting, fund-raising, investment, and/or organizational transformation decisions and operations.