Funding Implications of Normal and Excessive Profitability in the Nonprofit Sector

• In Event: Financial Reporting--Cash flow

Abstract

We examine the profitability of the nonprofit sector and its effect on external funding. Contrary to common perception, many nonprofit organizations (NPOs) report sizable profits. We find that overall profitability is associated with greater public support and government contributions. Achieving profitability is an important threshold for NPOs, failure to do so, especially in the case of persistent losses, draws a large negative reaction from contributors. Further, for profitable firms, the relationship between profitability and funding is not linear. When organizations are excessively profitable, they receive fewer subsequent donations and government grants. We conclude that although moderate profitability is desirable from funders’ point of view, extreme profits are not well received.

Authors

• Zhanel DeVides, Rutgers University - Camden

• Erica Harris, Villanova University