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Nonprofits urged to improve financial literacy

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Nonprofit finance

Nonprofit finance

Nonprofits are making better use of metrics and other tools to inform their financial decision-making but still have a lot of room to improve, a new report says.

While 76 percent of over 500 nonprofit financial-management professionals responding to a survey consider themselves to be knowledgeable in financial principles and concepts, for example, 17 percent see themselves as novices in terms of their level of financial knowledge, says Financial Literacy and Knowledge in the Nonprofit Sector, a report from The Center on Philanthropy at Indiana University.

Only 6.9 percent of respondents consider themselves to be financial experts, says the study, which was sponsored by The Moody’s Foundation.

And most nonprofits are lagging on some key financial functions, the report says.

Only 39.3 percent of organizations surveyed reported they had an audit committee, for example, and only 26.5 percent said their board was “very involved” in carrying out the task of financial scenario planning.

Nonprofit financial management has come under increased scrutiny in recent years, the report says, and “monitoring mechanisms” such as audit committees have taken on a more prominent role.

Members of audit committees, which are charged with helping the board of directors “maintain the organization’s overall integrity, financial credibility and long-term viability,” face greater scrutiny than ever as a result of an increased focus on good governance and fiscal responsibility, the report says.

“This report underscores the need for many nonprofit organizations to assess their financial monitoring mechanisms in light of the environment of analysis and accountability,” it says.

Nonprofit managers are aware it is important to be able forecast based on external factors, the report says, yet few board members are actively involved in financial scenario planning.

Scenario planning, it says, “increases an organization’s capability to more skillfully observe its environment, leading to more robust long-term organizational learning.”

To help measure “financial literacy,” or “the knowledge and skills of basic economic and financial concepts, as well as the ability to apply this knowledge in order to manage financial resources effectively,” survey respondents were asked three questions about bond prices and interest rates, investment risk, and diversification.

Among those responding, 36.4 percent answered all three questions correctly, while 32 percent answered two questions correctly.

Financial literacy grew with the number of courses respondents had taken in accounting, economics, operations and financial management, and with the size of organizational revenue.

And 49.8 percent of male respondents answered all three questions correctly, compared to 39.3 percent of female respondents, a statistically significant difference, the report says, although one that did not control for other possible factors, such as years of employment or years of education.

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