Good governance to strengthen the financial stability of nonprofit organizations in the social sector

The financial stability of nonprofit organizations that provide services in the social sector is important for all parties involved: the organizations naturally have a vested interest in their continued existence; clients need reliable and stable care; employees need secure jobs; donors, especially the public sector, demand reliable service provision. At the same time, public funding is limited by the principles of economy, efficiency and expediency of public administration. These requirements are also scrutinized by the audit institutions. The growing need for funding in the area of social services is increasing the pressure on government funding agencies in this regard.
This tension raises the question of the appropriateness of the financial performance relationships between the funding body and the nonprofit organizations. The funding agency must not jeopardize the financial stability of the nonprofit, but should avoid overfunding. The search for an answer is complicated by the fact that there is no consensus on appropriate metrics to measure "financial stability." This is also due to the fact that metrics must always be seen in the context of the framework of an organization being analyzed, and financial stability can be achieved in different ways (e.g., as a single organization or a group, with or without real estate assets).
Moreover, financial stability cannot simply be demanded from the outside. It is ensured by nonprofit organizations themselves, more or less in cooperation with the funding agency. This brings instruments and structures of organizational and public governance into focus, as well as the question of which forms of governance are conducive to financial stability. For the funding agency, the question of what requirements it can place on its contractual partners in terms of organizational governance is just as important as the question of the measurability of financial stability. The question of which forms of public governance (i.e., which forms of control and communication within the framework of the performance relationship) are conducive to the financial stability of the contracting partners also opens up scope for design. However, there is a lack of firm knowledge on how the financial stability of nonprofit organizations can be influenced through the use of appropriate governance structures and instruments (e.g., funding guidelines).

This research project therefore aims to answer the following two questions:

1. How can the financial stability of nonprofits in the social sector be measured, and what target measures can be recommended to these organizations and their funders?

The goal is to identify the most focused, but meaningful, selection of metrics that can adequately represent "financial stability" of nonprofits in the social sector, including the identification of configurations and ranges of desirable values. In particular, we will explore how metrics based on external accounting relate to more complex indicators of financial stability in terms of resource surplus ("organizational slack").

2. How are financial stability and governance related in this context?

The aim is to identify governance structures and instruments that are conducive to the financial stability of nonprofit organizations in the social sector. Based on this, recommendations for these organizations and their funding agencies will be derived in order to further develop their governance structures in the sense developed.

The research project was initiated by the NPO research team at WU. It is carried out in cooperation with the Fonds Soziales Wien. The role of the FSW is to provide administrative data, which is done after approval of the supporting organizations. Upon request, the sponsoring organizations will be involved more deeply in the project in the form of qualitative interviews and a participation event. In addition, a quantitative survey of the sponsoring organizations is planned. The results of the study will be published in open access, respecting the data protection of the individual participating and non-participating organizations. Only aggregated and anonymized results will be presented.

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