We’re all too familiar by now of nonprofits having to shut its doors because of lack of funds. Although we in the nonprofit sector know that it’s always a struggle to keep enough money coming in to make sure the work continues, the recent tough economic times put even more pressure to make ends meet.
At the Council we often say that trust is the life blood of a nonprofit. If a donor trusts that a nonprofit is accomplishing worthy results and is sustainable, they are more likely to give. The Financial Health standard is meant to help donors get a handle on whether or not an organization has the financial base to weather an economic storm. There are a lot of ideas around about what are the key indicators to gauge this. Because of that, we brought together financial experts to help us think this through and came to a compromise that focuses on unrestricted net assets. Specifically, the standard looks at whether a nonprofit has had 3 consecutive years of unrestricted net asset losses and whether the cumulative unrestricted net asset balance over 3 years is positive.
Now this standard doesn’t take into account how a nonprofit invests its unrestricted net assets and we have gotten feedback that this matters. If a nonprofit has a sizeable portion of its assets invested in a risky portfolio, one could argue that it isn’t “using its resources prudently” as the philosophy states. This argument has gotten even more credence in the aftermath of the Madoff scandal.
So our questions are twofold. First, is it a good enough indicator of financial health to be tracking unrestricted net assets? And is there a need to bolster this standard with something that addresses investment policies?