Report: Mid-Sized Charities Outperform Peers in Financial Health

A new research study, "Measuring the Financial Health of Mid-Sized Nonprofits," conducted by the Indiana University Lilly Family School of Philanthropy and sponsored by Bernstein Private Wealth Management (Bernstein), reveals that mid-sized charities (those with investable assets between $5 million and $75 million) are more financially resilient than their larger or smaller peers.

The researchers found that 69% of mid-sized nonprofits qualified as healthy in a greater portion of measurements used in the study, compared with 65% of large and 64% of small nonprofits. In addition, mid-sized nonprofits tend to have higher levels of liquid assets, adequate months of spending on hand, and a low debt ratio—meaning they are more cautious with their finances.

"While much of the research on the nonprofit sector tends to focus either on larger institutions or the more numerous small, grassroots organizations, far less is known about mid-sized nonprofits. Our study allows us to identify specific characteristics of mid-sized nonprofits' financial health," said Jon Bergdoll, Interim Director of Data and Research Partnerships at the school. "This research will better equip nonprofits in examining their financial health and will assist funders, donors and advisors in assessing and contextualizing the finances of nonprofits they may consider supporting."

Among the other key findings:

• Comparing Endowments Among Nonprofit Sizes: Mid-sized nonprofits closely resemble large nonprofits in endowment presence, with 55% reporting an endowment compared to 65% of large and 12% of small nonprofits.
• Analyzing Revenue Sources Across Nonprofit Sizes: Large nonprofits generate 7% of revenue from investment income, while mid-sized nonprofits generate 3%, and small nonprofits generate 1%.
• Evaluating Administrative Efficiency in Different Nonprofit Categories: 54% of mid-sized nonprofits have a "healthy" administrative ratio, surpassing small (44%) and large (52%) nonprofits.
• Assessing Debt Levels in Mid-Sized, Small and Large Nonprofits: Nearly two-thirds of both mid-sized (64%) and small (66%) nonprofits have a debt margin below 20%, compared to under half (49%) of large nonprofits.

Measuring the Financial Health of Mid-Sized Nonprofits delves into various aspects of nonprofits' financial health based on research from IRS Forms 990 data, case studies, and examples of best practices. It aims to broaden the understanding of financial health metrics across organizations of all sizes and provides practical advice to nonprofit leaders, ensuring they have a range of tools to achieve financial success.

Marisa Swystun, National Director, Foundation and Institutional Advisory team at Bernstein, commented, "We are seeing firsthand how data-driven insights can transform the operations of mission-aligned organizations across our global nonprofit and philanthropic client base. Through our collaboration with the Lilly Family School of Philanthropy, we are bringing vital, timely research to the field that helps nonprofit fiduciaries, board members, donors, and advisors better understand the forces shaping social impact and charitable giving today. By highlighting trends such as the financial resilience of mid-sized nonprofits, we aim to inform strategic decisions that ultimately amplify their impact."

Previous research studies often overlook the impact of organizational size and rely on a single financial measurement when assessing nonprofits' financial health. The new study explores six key measures— administrative ratio, months of spending on hand, debt margin, operating surplus as a percentage of assets, Debt Service Coverage Ratio (DSCR), and primary reserve ratio—to evaluate how they, combined with organizational size, influence nonprofits' financial well-being. The analysis spans more than 800,000 IRS Forms 990 data over the five-year period from 2019–2023, providing an in-depth view of nonprofit financial trends.

Implications for nonprofits, donors, funders and advisors:

• Engage nonprofit boards as vital partners in driving financial success through strategic collaboration with staff for effective mission fulfillment now and in the future.
• Strive for nonprofit budgets that blend and balance realistic expectations with aspirational goals to foster growth and sustainability.
• Consider investments in technology, staff development, and expertise alignment, and seizing new opportunities to ensure organizational relevance and mission fulfillment.
• Funders should consider providing unrestricted gifts to offer flexibility and demonstrate trust, addressing liquidity and debt concerns for mid-sized nonprofits.
• Learn from nonprofits that successfully navigated the challenges of the COVID-19 pandemic, adopting strategies such as maintaining higher operating reserves, enhancing financial flexibility, and diversifying revenue streams to build resilience and thrive in times of abundance.

Determining financial success across the nonprofit sector is challenging because the sector is large and diverse; organizations across subsectors build their income streams from different revenue models; and varying missions and goals make it difficult to define and compare financial health. The new report focuses on mid-sized nonprofits and offers practical paths for all nonprofits to pursue to achieve strong financial health. Higher operating reserves, financial flexibility, and for some, greater revenue diversification, help nonprofits move toward resiliency.

Access the "Measuring the Financial Health of Mid-Sized Nonprofits" report here.

Source: Bernstein Private Wealth Management

The preceding press release was provided by a company unaffiliated with NonProfit PRO. The views expressed within may not directly reflect the thoughts or opinions of the staff of NonProfit PRO.