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A new survey found a majority of nonprofit financial managers said they are knowledgeable of financial principles, but most of them failed to correctly answer basic questions about finances.
This is among findings of a survey conducted by the Center on Philanthropy at Indiana University that studied the knowledge, policies and procedures of a randomly selected group of mid-size nonprofits with revenues of $1 million to $5 million.
The survey found 76 percent of financial managers at mid-size nonprofits said they are knowledgeable about financial principles, but only a third correctly answered three basic financial literacy questions.
“This disconnect has potentially significant implications for nonprofits and the donors who place their trust in them. Solid financial knowledge is critical to sound decision making as nonprofits strive for financial well-being and greater impact,” the center's research director Una Osili said.
The survey showed a shift in financial priorities. Until recently, mid-size nonprofits often focused on breaking even. The survey findings indicate they are now putting more emphasis on maintaining a targeted level of cash reserves and financial flexibility (38 percent); assuring an annual surplus so the mission can be achieved in down years (27 percent); and then breaking even financially (24 percent).
Nearly half (49 percent) of mid-size nonprofits had less than three months’ worth of cash reserves for operating expenses available. A quarter (26 percent) had four to six months’ worth on hand, while another quarter had more than seven months of operating expenses.
• Respondents said they were knowledgeable about negotiating with banks or lenders (78 percent), cash flow projections (75 percent) and financial scenario planning (72 percent).
• Only 46 percent reported knowing about debt restructuring.
• Financial literacy increased with the number of courses taken in accounting, economics, operations and financial management, and with the nonprofit’s revenue.
• Boards were involved in accountability (66 percent), but less so in managing investments (38 percent), developing budgets (30 percent) and scenario planning (27 percent).
• Less than 40 percent of nonprofits surveyed had an audit committee.
The 2012 Financial Literacy and Knowledge in the Nonprofit Sector Study is available here,