Nonprofit Financial Vulnerability: Testing Competing Models, Recommended Improvements, and Implications

We examine the predictive validity of existing models used by researchers and by professional rating agencies of nonprofit organizations to assess financial vulnerability, on a sample of performing arts organizations. The models tested include Ohlson’s (J Account Res 18(1):31–109, 1980) “business” model, Tuckman and Chang’s “nonprofit” model (Nonprofit Volunt Sect Q 20:445–460, 1991), and a “practitioner” model based on the guidelines of two nonprofit ranking and rating agencies (Copps and Vernon, The little blue book, NPC’s guide to analyzing charities, for charities and funders. New Philanthropy Capital, London, 2010; Midot, Midot guide for effectiveness. Midot—Analyzing and Rating NPOs. Tel Aviv, 2013). Since there is considerable criticism over the effectiveness of existing models in predicting financial distress, we propose that a new model is needed which can improve our ability to predict financial vulnerability. The findings reveal that the Tuckman and Chang model provides the best prediction of financial vulnerability; and a reduced version offers an even better prediction. Implications for financial management and particularly for revenue diversification, increased overhead costs (particularly management costs), and surplus accumulation are discussed.