Financial Metrics as Predictors of Financial Vulnerability and Nonprofit Failure

Studying nonprofit's risk factors for financial vulnerability and possible demise is important because of the negative social consequences for both the failed organization and its stockholders. Financial vulnerability is a concern shared by all nonprofit's stakeholders as poor financial health affects nonprofit's ability to fulfill its mission, sustain its operations, and in many cases may result in a nonprofit demise. Advance knowledge on financial vulnerability has significant implications for nonprofit's leaders to develop corrective strategies to prevent failure. Nonprofit scholars such as Tuckman and Chang, Greenlee, Hager, and Searing have contributed notable benchmarks in the field of nonprofit vulnerability, by searching for associations between wide-ranging metrics and 'financial vulnerability' as defined by the individual researcher. Only few studies examined the association between financial metrics and the ultimate consequence of financial vulnerability - a nonprofit actual failure. This thesis aims to add to that knowledge by examining financial metrics and their association with failed or on-going nonprofits. It also examines which metrics, when combined in a statistical model, can predict future financial vulnerability which is useful information for nonprofit stakeholders when making funding and operational decisions. This study confirms that revenues, overhead ratio, and the ratio between Program Service Expense and Fund Surplus are associated with nonprofit failure, and that these metrics can be used to predict which nonprofits are financially vulnerable and susceptible to failure within the next 12 months. This knowledge may help reduce the hazard of funding a destine-to-fail nonprofit, increase funding to strengthen vulnerable nonprofits that are the sole providers of goods and services in a community, and put nonprofit management on notice so they can take corrective actions.