Towards Predicting Financial Failure in Non-Profit Organisations

Towards Predicting Financial Failure in Non-Profit Organisations

Sharon Cheuk (Universiti Malaysia Sarawak, Malaysia)
DOI: 10.4018/978-1-4666-9484-2.ch019
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Abstract

Non-profit organisation financial failure has been a prevalent problem in developed and developing economies. Such incidences bring adverse effects to the reputation of the non-profit organisation in question and the third sector as a whole, especially if the organisation in question is significantly large in size, leading to possible knock-on effects such as disruption to society, litigation, loss of investor confidence in the economic environment, and a worsening of a country's ranking under the Corruption Perceptions Index. This chapter examines past financial failures amongst non-profits and reviews past literature on attempts to predict non-profit failures before they occur. Finally, it proposes an additional governance-related factor to be taken into consideration when considering potential financial distress amongst non-profit organisations. Suggestions for further research are made accordingly.
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Introduction

Non-profit organisation failure has been a problem that has been plaguing developed countries. In 2008, a scholar of philanthropy and government predicted that more than 100,000 nonprofit groups in the US would fail within the next two years (Wasley, 2008), and a fifth of small charities in the UK were at the risk of closure, at the end of 2013, if their finances did not improve (Swinford, 2013). Such failures were attributed to the poor economy and the resulting fall in donation levels (Doward, 2012), lack of funding in general (Griesmann, 2012), increased competition for funding, even with for-profit organisations (Steuerle, 2007), lack of administrative capacity (Wasley, 2008), lack of transparency and risk management, inadequate resource planning and development, inadequate fiscal controls, failure to set and adhere to best practices, policies, procedures and standards (Griesmann, 2012), and theft and embezzlement (Snyder, 2013), amongst others.

A good number of financial failures have been noted amongst non-profit organisations in the Asian region, which is a worrying development. For example, in City Harvest Church Singapore, the senior pastor and four other church members were arrested and charged with conspiracy to commit criminal breach of trust for misusing over SGD$50 million of church money (Channel News Asia Singapore, 2012). Also in Singapore, the founder and former chief executive of Ren Ci Hospital, Shi Ming Yi was found guilty of fraud, falsifying documents, misappropriating funds and giving false information to the Commissioner of Charities (Chan, 2009).

In the Calvary Church Kuala Lumpur, the senior pastor was accused of the following issues, amongst others: the rising construction costs of a church building project, transfer of substantial funds from the church into the accounts of a personal ministry headed by him without church members’ knowledge and poor financial management. In fact, some of the members reacted by forming a governance group to demand for accountability and transparency over the use of church funds, and lodging a police report over the matter (Fernandez and Michael, (2009); Sunday Star, 2010). These members also decided to stop giving their financial support to the church (Calvary Today, n.d.).

Key Terms in this Chapter

Non-Profit Organisation (NPO): A non-profit organisation (NPO) uses surplus revenues to achieve its mission; unlike a for-profit organisation, it does not distribute them as profit or dividends. Surplus revenues are retained by the organisation for self-preservation or for further expansion. NPOs are usually governed by a board of trustees or directors; larger NPOs employ paid staff including management, while smaller NPOs utilise volunteers (usually unpaid).Unlike a for-profit organisation, an NPO does not have owners (or shareholders). NPOs can be organised in different forms, including charitable trusts, companies limited by guarantee, registered societies, trust companies, co-operatives, private foundations and public charities. A charitable organisation is an NPO that focuses on non-profit and philanthropic goals as well as social well-being (e.g. charitable, educational, religious, or other altruistic activities). They are usually tax-exempt, or at least enjoy tax benefits.

Profitability: The profitability of an entity refers to an entity’s ability to generate earnings or income as compared to its expenses and other relevant costs incurred during a specific period of time.

Non-Profit Governance: Non-profit governance refers to the responsibility that a board of trustees has, as well as the control processes put in place, with respect to the exercise of authority over the public trust that is understood to exist between the mission of an organisation and those whom the organisation serves.

Activity: The activity of an entity refers to its ability to manage its assets and liabilities internally.

Leverage: The leverage of an entity refers to the amount of debt used to finance an entity’s assets.

Financial Vulnerability: Financial vulnerability describes the ability to recover from sudden financial shocks, which include sudden and unexpected loss of income and/or a sudden and uncontrollable increase in expenditure.

Liquidity: The liquidity of an entity refers to the measure of the extent to which the entity has short term assets (perhaps cash or cash equivalents) to meet immediate and short-term obligations.

Solvency: The solvency of an entity refers to the ability of the entity to meet its long-term financial obligations.

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