*Names in bold indicate Presenter
Much of the existing nonprofit financial management literature focuses on how nonprofit organizations bring in revenue from various financial sources, such as fundraising, donation, capital campaign, and so forth. Less attention has been paid to how nonprofit organizations allocate their existing financial resources, and how to balance spending and saving. My study examines nonprofits’ saving behavior and the impact of nonprofits’ operating reserves on nonprofit organizations’ financial conditions—whether nonprofit organizations’ operating reserves mitigate nonprofit organizations’ financial vulnerability.
I use the SOI financial data between 2001 and 2011, which covers two periods of economic recessions. The dependent variable is nonprofit financial vulnerability. A nonprofit organization is defined as financially vulnerable if it reduces its expenditures on programs by more than 20% for three consecutive years. The primary independent variable is operating reserve ratio. It is calculated by using operating reserves divided by the annual expense budget. Key control variables include those factors that have been examined by previous researchers that they may have significant impacts on the financial condition of nonprofit organizations. Those are: revenue diversification, program expense ratio, short-term leverage ratio, sector, donative organization, and log of assets. A fixed effects regression will be employed to address the omitted variable bias problem and also to control for other unobserved factors. The explanatory variables will be lagged one year to mitigate potential endogeneity concerns.
This study contributes to the nonprofit financial management literature by examining the impact of maintaining operating reserves on nonprofits’ financial conditions that has not attracted much research attention. I expect the results from this study will provide recommendations to nonprofit management, especially to board members and managers seeking sound financial management practice and the sustainability of their organizations.