Proverbs of Nonprofit Financial Management

Abstract

Whereas the field of public administration has benefited from periods of critical reflection and reform aimed at reexamining the field’s traditional management paradigms, the related field of nonprofit management has generally lacked such an analogously explicit and sustained research program to reevaluate its own conventional wisdoms. Meanwhile, accumulated findings from the last several decades of nonprofit management research have problematized many traditional assumptions and practices in nonprofit management, specifically regarding the soundness of nomothetic management theory, the unintended negative consequences of certain management norms, and underlying assumptions about the nature and purpose of nonprofit management. This article critically reexamines four well-known “proverbs” of nonprofit financial management—minimize overhead, diversify revenues, be lean, and avoid debt—to demonstrate the need for a critical and reflective research program that takes stock and reconsiders the field’s foundational principles and assumptions. Implications are derived for scholars and practitioners, as well as for information intermediaries that evaluate nonprofits based on financial information.

If Someone Else Pays for Overhead, Do Donors Still Care?

“…Against this backdrop, Mitchell and Calabrese (2019) argue that minimizing overhead constitutes a fundamental paradigm that guides nonprofit financial management. Although public administration scholars continuously reevaluate the dominant managerial paradigms within the public sector (such as new public management and more recently new public governance), so far the guiding principles of nonprofit management are less frequently questioned in scholarly work.…”

Toward a valid approach to nonprofit efficiency measurement

“…Although recent literature puts forth healthy suspicion (Bowman, ; Mitchell & Calabrese, ), the purpose of this study is not to disqualify the overhead or administrative ratio (or other financial ratios) as a useful tool for nonprofit management. We also do not attempt to address here whether increasing overhead ratios cause inefficiency (though, with the correct available controls and appropriate statistical models, we suspect that this would be a useful scholarly contribution).…”

Fiscal Responses toCOVID‐19: Evidence from Local Governments and Nonprofits

“…Nonprofit financial management is well known for the “four proverbs”—be lean, minimize overhead, diversify revenue, and avoid debt (Mitchell and Calabrese 2019). While these financial and budgeting practices increase the effectiveness of nonprofits’ financial operations during normal periods, they also prevent organizations from building up reserves and leave them with little wiggle room to react to unexpected events like this pandemic.…”