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Environmental factors are social, economic, and political (SEP) issues that may affect funding, support, and operations of a nonprofit organization in ways that determine whether such organization will survive.
Social issues can create an environmental that is hostile to a nonprofit organization and lead to its closing. The closing of many Planned Parenthood clinics is a great example. Feminist Wire (2013) reported the closing of several Planned Parenthood clinics in Texas. Planned Parenthood is a national nonprofit organization that maintains local health clinics, which provide various women's health services that some women may not be able to find elsewhere. Therefore, the beneficiaries to these services may rely solely on Planned Parenthood to receive services that can be a matter of life or death. I use the closing of Planned Parenthood clinics in Texas as a random example. However, this is representative of a larger trend, which has seen the closing of Planned Parenthood clinics in many other U.S. states. The closing resulted from the controversial social issue of abortion, which is one of the many services available at Planned Parenthood clinics. When the clinics are forced to close, this affects not only the beneficiaries, but also the overall financial conditions of that agency. In more specific terms, the funding that used to come as a result of fee-based services from such clinics is no longer available.
Economic or financial crises can affect donor abilities to contribute to nonprofit organizations and affect their financial sustainability. The Nonprofit Finance Fund (2011) conducted a survey on the impact of the 2008 financial crisis on nonprofit organizations in the United States.
About 50% of respondents identified themselves as nonprofit organizations that provide services that are critical to the health and safety of those in need. More than 70% of them saw increases in demand for services and significant decreases in the financial contributions they used to receive. As a result, some of them had to use their reserve funds, reduce the amount of services, and maintain accumulated deficits that may lead them to bankruptcy.
Changes in government and legislatures can be a threat to the financial sustainability of a nonprofit organization. Hulse (2009) reported in the New York Times that the U.S. House of Representatives voted to ban federal funds for the nonprofit organization Association of Community Organizations for Reform Now (ACORN) over a controversial video. ACORN was a collection of community-based, nonprofit organizations with about 500,000 members at its peak, which used to advocate for low- and moderate-income families on various social issues, such as health care, voter registration, affordable housing, neighborhood safety, and other similar issues. Later, the video that was the basis for cutting funding for ACORN was found to be edited and baseless (Rovzar, 2013). Although ACORN used to receive about 10% of its funding from the federal government, all the other streams of income evaporated as a result of a political action by the U.S. House of Representatives. The organization had no choice but to dissolve.
INDICATORS OF FINANCIAL SUSTAINABILITY
Financial sustainability is an ongoing process. It is difficult to say in absolute terms that a nonprofit organization is financially sustainable, given all the factors that are not exclusively financial, which affect the financial sustainability of nonprofit organizations. However, there are key indicators that can help determine whether an organization is on a path to financial sustainability.
As Figure 2.2 illustrates, indicators include, but are not limited to:
- Culture of strategic planning and performance measurement
- Culture of stewardship and accountability
- In-house-generated income is diverse and greater than public funding
- Sustained high profitability (growth)
- Sustained increase in solvency
- Sustained increase in liquidity
- Rainy-day fund is at least equal to the equivalent of the 1-year budget for core expenses
- Outstanding level of staff satisfaction and commitment equal to or greater than 90%
- Outstanding level of program efficiency equal to or greater than 90%
- Effective and tested risk-management policy