Signs Which May Indicate Financial Trouble For Nonprofit Organizations

Community Support

Decline in utilization of organization’s services by the local community (fewer students, patients, visitors, members or other users)
Decline in real dollar (inflation-adjusted) support through gifts, bequests and membership dues
Decline in hours of time made available by volunteers
Increasing incidence of turndown of grant requests
Criticism of the organization or its programs by public figures or media

Financial Independence

A growing percentage of expenditures for basic operations funded by restricted grants
A growing percentage of unrestricted revenues committed to meet matching-fund requirements or needed to supplement restricted revenues for special projects
Increasing use of “next year’s” cash to pay this year’s expenses, e.g., prepaid dues, ticket sales, tuition, etc.
Increasing reliance on very few different sources of support
A growing debt burden
Rapid increases in fixed or semi-fixed cash costs (salaries and fringes, rent, debt service, etc.)
Continuing decline or deficit in operating income or unrestricted net assets
Continuing decline or, especially, overdraft in cash and equivalents

Productivity

Cost per unit of service rising disproportionately to inflation
Number of employees per unit of service rising rapidly
User fee rates rising rapidly (unless resulting from a deliberate management decision to reduce the amount by which such fees are subsidized from other revenue sources

Deferred Current Costs

Proceeds of long-term debt or sales of long-term investments being used for current purposes
Deferring needed maintenance and/or replacement of capital assets
Default on debts (bonds, notes, mortgages, interest)
Inability to pay salaries or other current expenses – especially payroll or other taxes – when due, or borrowing to cover such amounts shortly before payment
Borrowing of cash or other assets from restricted funds or other diversion of restricted resources to inappropriate purposes

Management Practices

A pattern of budget cost overruns, either overall or in specific programs/departments
Increasing incidence of revenue shortfalls
Earnings on investments declining disproportionately to general trends of investment yields
Interest rates charged by lenders increasing disproportionately, unwillingness of lenders to lend to organization or insistence by lenders on burdensome debt covenants
Levels of receivables, inventory, or prepaid expenses increasing faster than related activity
Increasing incidence of funding source challenge or disallowance of expenses
Financial and operating data being provided to board members and management is delayed, unclear or incomplete. Explanations of key items and variances are unavailable or of doubtful validity
Failure on the part of board members or management to understand and accept the seriousness of the financial situation

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