A review of financial warning signs for nonprofit organizations and how to obtain this information from IRS Form 990.

1. Russell James, J.D., Ph.D., Texas Tech University
Predicting
Nonprofit
Crisis &
Death

2. Why would you care?
• You or your client is
considering a
substantial charitable
gift
• You work or want to
work for a nonprofit
• You work for a
foundation that reviews
proposals from
nonprofit organizations

3. The tools for evaluating
the stability of a non‐
profit are similar to the
tools for evaluating a
for‐profit, with some
variations

4. Similar to other
companies we examine
• Income and income
trends
• Expenditure and
expenditure trends
• Net income and net
income trends
• Asset/debt and
Asset/debt trends
• Cash and cash trends

5. We also must understand
• Permanently restricted funds
• Temporarily restricted funds
• Unrestricted funds

6. A restricted asset is
usually one received
with a donor’s
requirement that it be
used for a particular
purpose.
If the organization
violates that
instruction, the donor
(or donor’s heirs) have
the right to demand
return of the money.

7. Temporarily restricted
means that the funds
are being held
temporarily until they
will be spent for a
designated purpose,
such as constructing a
building.
Permanently restricted
means that the funds
cannot be spent, but
typically the income
can be used to support
certain programs.

8. How do you get the financial information?
In cases where you
don’t have access to
internal financial
statements, you can
get the IRS form 990

9. IRS Form 990
• Nonprofits with
income >$25,000
(except churches)
must file annually
• Nonprofits must
provide upon request
(else IRS fines)
• Available online

10. Free online sources for IRS Form 990s
• www.guidestar.org (free registration required)
• foundationcenter.org/findfunders/990finder/
• http://nccs.urban.org/ (click on “find an
organization”)
• http://www.eri‐nonprofit‐salaries.com/index.cfm
(click on “Search Form 990s)

11. Historical 990s
990 forms before 2001
are generally not
available online
You can request these
from the IRS using the
form at
http://www.irs.gov/pub/i
rs‐pdf/f4506a.pdf

12. Let’s pick a nonprofit
organization and learn about it

13. Finding the 990 Form
For this example we will use:
foundationcenter.org/findfu
nders/990finder/

14. Enter
the
name

15. We get
lots of
different
nonprofits
with
“Texas
Tech” in
the name.
So, let’s
scroll
down to
the one
we are
most
interested
in…

16. Here is the
Texas Tech
Foundation,
with about
½ billion in
assets.
Click on the
2010 Form
990.
Notice
there is a
lag between
fiscal year
and posting
of about 18‐
24 months.

17. This is page 1 of the
Form 990.
Let’s answer some
questions about the
organization.

18. This form covers
what period of
time?

19. This form covers
what period of
time?
September 1, 2009
to
August 31, 2010

20. What does this
organization do?

21. What does this
organization do?
It is the foundation
for Texas Tech
University.

22. How much money
did the organization
raise in the current
year?

23. How much money
did the organization
raise in the current
year?

24. How does this
compare with the
previous year?

25. How does this
compare with the
prior year?

26. How much money
did this organization
get from operations
(program service
revenue)?

27. How much money
did this organization
get from operations
(program service
revenue)?
This is a non‐
operating
organization.
It simply holds,
invests, and
distributes money.

28. How did
investments do this
year as compared
with last?

29. How did
investments do this
year as compared
with last?

30. Did assets go up or
down?
Liabilities?
Net assets?

31. Did assets go up or
down?
Liabilities?
Net assets?

32. More detail
is provided
in the
balance
sheet (here
on page 11
of the
form)

33. Here we
see that
most assets
are held in
publicly
traded
securities

34. About $40
million is in
pledges.
Charitable
pledges can
be legally
enforced,
and so
must be
recorded as
assets.

35. What does
this mean?

36. The
foundation
“has”
almost
$450
million.
But, it only
has
spending
authority
over about
$13 million.

37. How can
you tell if an
organization
is dying?

38. Most people die of the
same cause – lack of
oxygen to the brain.
All business die of the same
cause – they run out of
access to cash.
Nonprofits run out of
access to unrestricted cash.

39. Profit is opinion. Cash is reality.
Many assets are
difficult to value, e.g.,
some real estate,
“good will”, future
income streams,
pledges, special
purpose entities, etc.
Before its collapse,
Enron had great
“profits” (using hard‐
to‐value assets) but
little cash.

40. A collapsing nonprofit
will burn through
available cash. Side
effects include:
• Spending down liquid
assets
• Borrowing money
• Paying bills later
• Lack of investing in
tangible assets

41. Nonprofit organizations are
notoriously slow at downsizing.
Consequently, falling income is
particularly dangerous for nonprofits.
Watch for:
• Program service revenue trends
• Contributions trends
• Net income trends

42. Even if a nonprofit is
collapsing, it still has
opportunities to turn
itself around before
the time runs out,
depending upon its
unrestricted net
assets.

43. A rare, but extremely
concerning, sign is the use
of accounting gimmicks to
present a stronger
balance sheet, ex:
• Assets or income
improving not from cash
but from hard‐to‐value
forms
• Avoiding foreclosure
through sale and
leaseback, showing
profit from deed‐in‐lieu
of foreclosure, showing
gift income from debt
forgiveness due to
collection concerns

44. Research on
predicting
nonprofit
financial
distress

45. Tuckman & Chang
Predictor Variables
• net assets / total revenues [+]
• revenue concentration index defined
as [‐]
• net income /total revenues [+]
• administrative expenses / total
revenues [+]
Tuckman, H., Chang, C., 1991. A methodology for measuring the financial vulnerability
of charitable nonprofit organizations. Nonprofit and Voluntary Sector Quarterly 20(4),
445‐ 60.

46. Altman Predictor Variables
• working capital / total assets (+)
• net assets divided by total assets (+)
• earnings before interest and taxes / total assets (+)
• total revenue / total assets (+)
A model used to predict corporate bankruptcies from
Altman, E., 1968. Ratios, discriminant analysis, and the prediction of
corporate bankruptcy. Journal of Finance, 23(4), 589‐609.

47. Ohlson Predictor Variables
• working capital / total assets [+]
• size = ln(Total Assets/GDP price index) [+]
• total liabilities / total assets [‐]
• current liabilities / current assets [‐]
• net income / total assets [+]
• (pre‐tax income + depreciation + amortization) / total
liabilities [+]
• net Income was negative for the last year [‐]
• (NIt‐NIt‐1)/(|NIt|+|NIt‐1|) scaled net income growth [+]
A model used to predict corporate bankruptcies from
Ohlson, J., 1980. Financial ratios and the probabilistic prediction of
bankruptcy. Journal of Accounting Research 18 (1), 109‐31.

48. What is the best predictor?

49. What is the best predictor?
In a simultaneous test of the previous measurements,
the only one that was highly significant and consistent
across 4 types* of nonprofit disruption risk was
negative net income in the previous year.
*(1) Insolvency risk represents negative net assets
(2) Financial disruption risk represents a 25% or
more decline in net assets (3) Funding disruption
risk represents a 25% or more decline in total
revenues (4) Program disruption risk represents a
25% or more decline in program expenses; from
Elizabeth K. Keating, Mary Fischer, Teresa P. Gordon,
Janet Greenlee. (2005). Assessing Financial
Vulnerability in the Nonprofit Sector

50. What is the best predictor?
In a simultaneous test of the previous measurements,
the only one that was highly significant and consistent
across 4 types* of nonprofit disruption risk was
negative net income in the previous year.

51. Let’s look at a small college that closed in 2008.
What early trends were cause for concern?

52. 2003
Annual deficit, assets dropping, liabilities rising,
unrestricted net assets becomes negative
Puget Sound Christian College (in $ thousands) Moved
FY 2002 2003 2004 2005 2006 2007
Total Contributions 804 541 1,924 867 558
Cash Contributions 804 534 914 442 558
Program Service Revenue 1,519 1,361 1,212 1,282 1,176
Total Revenue 2,483 2,003 3,686 3,011 1,892
Total Expenses 3,173 2,760 2,275 2,962 2,085
Excess/Deficit ‐691 ‐757 1,412 50 ‐193
Total Assets 4,609 4,015 3,490 1,925 2,123 1,268
Total Liabilities 3,813 3,910 4,234 1,258 1,405 743
Unrestricted Net Assets 30 ‐872 ‐1765 ‐255 ‐200 ‐392
Temp Restricted 154 352 396 297 291 291
Perm Restricted 612 625 624 625 626 625

53. 2004
Contributions falling, program revenue falling,
annual deficit, rising liabilities, falling assets
Puget Sound Christian College (in $ thousands) Moved
FY 2002 2003 2004 2005 2006 2007
Total Contributions 804 541 1,924 867 558
Cash Contributions 804 534 914 442 558
Program Service Revenue 1,519 1,361 1,212 1,282 1,176
Total Revenue 2,483 2,003 3,686 3,011 1,892
Total Expenses 3,173 2,760 2,275 2,962 2,085
Excess/Deficit ‐691 ‐757 1,412 50 ‐193
Total Assets 4,609 4,015 3,490 1,925 2,123 1,268
Total Liabilities 3,813 3,910 4,234 1,258 1,405 743
Unrestricted Net Assets 30 ‐872 ‐1765 ‐255 ‐200 ‐392
Temp Restricted 154 352 396 297 291 291
Perm Restricted 612 625 624 625 626 625

54. 2005
Huge contributions, Huge surplus… Really?
Puget Sound Christian College (in $ thousands) Moved
FY 2002 2003 2004 2005 2006 2007
Total Contributions 804 541 1,924 867 558
Cash Contributions 804 534 914 442 558
Program Service Revenue 1,519 1,361 1,212 1,282 1,176
Total Revenue 2,483 2,003 3,686 3,011 1,892
Total Expenses 3,173 2,760 2,275 2,962 2,085
Excess/Deficit ‐691 ‐757 1,412 50 ‐193
Total Assets 4,609 4,015 3,490 1,925 2,123 1,268
Total Liabilities 3,813 3,910 4,234 1,258 1,405 743
Unrestricted Net Assets 30 ‐872 ‐1765 ‐255 ‐200 ‐392
Temp Restricted 154 352 396 297 291 291
Perm Restricted 612 625 624 625 626 625

55. 2005
Religious loan provider takes deed to campus
and “gifts” the difference by forgiving the loan
Puget Sound Christian College (in $ thousands) Moved
FY 2002 2003 2004 2005 2006 2007
Total Contributions 804 541 1,924 867 558
Cash Contributions 804 534 914 442 558
Program Service Revenue 1,519 1,361 1,212 1,282 1,176
Total Revenue 2,483 2,003 3,686 3,011 1,892
Total Expenses 3,173 2,760 2,275 2,962 2,085
Excess/Deficit ‐691 ‐757 1,412 50 ‐193
Total Assets 4,609 4,015 3,490 1,925 2,123 1,268
Total Liabilities 3,813 3,910 4,234 1,258 1,405 743
Unrestricted Net Assets 30 ‐872 ‐1765 ‐255 ‐200 ‐392
Temp Restricted 154 352 396 297 291 291
Perm Restricted 612 625 624 625 626 625

56. 2006
New Life? (Operating at a surplus, right?)
Puget Sound Christian College (in $ thousands) Moved
FY 2002 2003 2004 2005 2006 2007
Total Contributions 804 541 1,924 867 558
Cash Contributions 804 534 914 442 558
Program Service Revenue 1,519 1,361 1,212 1,282 1,176
Total Revenue 2,483 2,003 3,686 3,011 1,892
Total Expenses 3,173 2,760 2,275 2,962 2,085
Excess/Deficit ‐691 ‐757 1,412 50 ‐193
Total Assets 4,609 4,015 3,490 1,925 2,123 1,268
Total Liabilities 3,813 3,910 4,234 1,258 1,405 743
Unrestricted Net Assets 30 ‐872 ‐1765 ‐255 ‐200 ‐392
Temp Restricted 154 352 396 297 291 291
Perm Restricted 612 625 624 625 626 625

57. 2006
Notice the contributions that are “non‐cash”.
What would the “surplus” have been without
these?
Puget Sound Christian College (in $ thousands) Moved
FY 2002 2003 2004 2005 2006 2007
Total Contributions 804 541 1,924 867 558
Cash Contributions 804 534 914 442 558
Program Service Revenue 1,519 1,361 1,212 1,282 1,176
Total Revenue 2,483 2,003 3,686 3,011 1,892
Total Expenses 3,173 2,760 2,275 2,962 2,085
Excess/Deficit ‐691 ‐757 1,412 50 ‐193
Total Assets 4,609 4,015 3,490 1,925 2,123 1,268
Total Liabilities 3,813 3,910 4,234 1,258 1,405 743
Unrestricted Net Assets 30 ‐872 ‐1765 ‐255 ‐200 ‐392
Temp Restricted 154 352 396 297 291 291
Perm Restricted 612 625 624 625 626 625

58. 2006
Compare the non‐cash contributions to a
normal year such as 2003 or 2004, … new
accounting strategy?
Puget Sound Christian College (in $ thousands) Moved
FY 2002 2003 2004 2005 2006 2007
Total Contributions 804 541 1,924 867 558
Cash Contributions 804 534 914 442 558
Program Service Revenue 1,519 1,361 1,212 1,282 1,176
Total Revenue 2,483 2,003 3,686 3,011 1,892
Total Expenses 3,173 2,760 2,275 2,962 2,085
Excess/Deficit ‐691 ‐757 1,412 50 ‐193
Total Assets 4,609 4,015 3,490 1,925 2,123 1,268
Total Liabilities 3,813 3,910 4,234 1,258 1,405 743
Unrestricted Net Assets 30 ‐872 ‐1765 ‐255 ‐200 ‐392
Temp Restricted 154 352 396 297 291 291
Perm Restricted 612 625 624 625 626 625

59. 2007
The final year of operation. Sale of the recently
acquired property.
Puget Sound Christian College (in $ thousands) Moved Closed
FY 2002 2003 2004 2005 2006 2007
Total Contributions 804 541 1,924 867 558
Cash Contributions 804 534 914 442 558
Program Service Revenue 1,519 1,361 1,212 1,282 1,176
Total Revenue 2,483 2,003 3,686 3,011 1,892
Total Expenses 3,173 2,760 2,275 2,962 2,085
Excess/Deficit ‐691 ‐757 1,412 50 ‐193
Total Assets 4,609 4,015 3,490 1,925 2,123 1,268
Total Liabilities 3,813 3,910 4,234 1,258 1,405 743
Unrestricted Net Assets 30 ‐872 ‐1765 ‐255 ‐200 ‐392
Temp Restricted 154 352 396 297 291 291
Perm Restricted 612 625 624 625 626 625

60. Once a nonprofit
institution hits negative
unrestricted assets, the
time for a turnaround is
relatively short

61. But a turnaround
is still possible.

62. Central Christian College, Moberly, MO ended
FY 1999 with negative unrestricted net assets
after operating losses in 10 of previous 11 years.
I took over as president in the following year (FY
2000) and stayed until the first part of FY 2006.
(in $ thousands) FY 1999 2000 2001 2002 2003 2004 2005 2006
Contributions 1395 1660 1135 1484 1735 1087 992
Program Service Revenue 1048 1079 1648 2102 2873 5500 6520
Total Revenue 2541 2882 2866 3678 4704 6721 7662
Total Expenses 1689 2114 2732 3232 3556 5573 6849
Excess/Deficit for year 852 768 134 445 1148 1148 815
Total Assets 2465 3205 4139 4345 4824 6596 7487 9079
Total Liabilities 1663 1551 1717 1789 1823 2447 2189 2966
Unrestricted Net Assets ‐10 461 1176 1811 1987 3348 4459 5242
Temporarily Restricted 237 600 536 41 293 42 47 36
Permanently Restricted 575 593 712 704 722 760 793 836

63. How financially
stable are most
nonprofit
organizations?

64. Number of months of operating
expenses available by nonprofits
From: Financial Literacy and the Nonprofit Sector. (2012) The Center on Philanthropy at Indiana
University

65. Nonprofit Financial Vulnerability
Financial Funding Program
Firms Insolvency Disruption disruption Disruption
Arts 28,320 5.90% 16.16% 15.31% 10.88%
Education 44,912 3.54% 14.23% 13.14% 9.21%
Health 47,870 7.55% 13.93% 11.33% 9.74%
Human
105,730 10.49% 13.99% 9.37% 7.09%
Services
Religious 13,972 5.15% 17.89% 14.79% 10.93%
Other 49,775 3.82% 14.14% 18.47% 12.74%
Total 290,579 7.08% 14.44% 12.67% 9.38%
(1) Insolvency represents negative net assets (2) Financial disruption risk represents a 25% or
more decline in net assets (3) Funding disruption risk represents a 25% or more decline in total
revenues (4) Program disruption risk represents a 25% or more decline in program expenses;
From: Assessing Financial Vulnerability in the Nonprofit Sector (2005) Elizabeth K. Keating, Mary
Fischer, Teresa P. Gordon, Janet Greenlee

66. The Bottom Line
Organizations that consistently
take in less cash than they put
out are in the process of dying.
A variety of measurements can
indicate trouble, but some can
be intentionally skewed.
Focus on changes in cash and
debt.

67. Graduate Studies in
Charitable Financial Planning
at Texas Tech University
This slide set is from the curriculum for
the Graduate Certificate in Charitable
Financial Planning at Texas Tech
University, home to the nation’s largest
graduate program in personal financial
planning.
To find out more about the online
Graduate Certificate in Charitable
Financial Planning go to
www.EncourageGenerosity.com
To find out more about the M.S. or
Ph.D. in personal financial planning at
Texas Tech University, go to
www.depts.ttu.edu/pfp/

68. About the Author
Me (about 5 years ago)
Russell James, J.D., Ph.D., CFP® is an Associate
Professor and the Director of Graduate
Studies in Charitable Planning in the Department
of Personal Financial Planning at Texas Tech
University. He graduated, cum laude, from
the University of Missouri School of Law
where he was a member of the Missouri Law
Review. While in law school he received the Lecturing in Germany. 75 extra students
United Missouri Bank Award for Most showed up. I thought it was for me until I
Outstanding Work in Gift and Estate Taxation found out there was free beer afterwards.
and Planning and the American Jurisprudence
Award for Most Outstanding Work in Federal At Giving Korea 2010. I
Income Taxation. After graduation, he worked didn’t notice until later
as the Director of Planned Giving for Central the projector was
Christian College, Moberly, Missouri for six shining on my head
years and also built a successful law practice (inter‐cultural height
limited to estate and gift planning. He later problems).
served as president of the college for more
than five years, where he had direct and
supervisory responsibility for all fundraising. Dr. James received his Ph.D. in Consumer
& Family Economics from the University of Missouri where his dissertation was on the
topic of charitable giving. Dr. James has over 100 publications in print or in press in
academic journals, conference proceedings, professional periodicals, and books. He
has been quoted in a variety of news outlets including The Wall Street Journal, The
New York Times, U.S. News & World Reports, Associate Press, and USA Today.