Revenue Structure and Spending Behavior in Nonprofit Organizations

• Published date: 01 August 2019
• Author: Jongmin Shon,Madinah F. Hamidullah,Lindsey M. McDougle
• Date: 01 August 2019
• DOI: 10.1177/0275074018804562
• Subject Matter: Articles

https://doi.org/10.1177/0275074018804562

American Review of Public Administration

2019, Vol. 49(6) 662 –674

© The Author(s) 2018

Article reuse guidelines:

sagepub.com/journals-permissions

DOI: 10.1177/0275074018804562

journals.sagepub.com/home/arp

Article

Introduction

Nonprofit organizations (NPOs) are often forced to balance

organizational resource needs with the needs of employees

and stakeholders. Increases in personnel and administrative

spending could provide NPOs with the resources needed to

develop and deliver critical programming. However,

increases in these areas can also give the public an impres-

sion that NPOs are being ineffectively managed and failing

to allocate resources toward program services (Calabrese,

2011). For instance, even when nonprofit executive compen-

sation is within Internal Revenue Service (IRS) guidelines,

NPOs may compensate their executives at a level that is

greater than what is expected by the general public and other

stakeholders—such as policy makers and media representa-

tives (GuideStar, 2011). As a consequence, the public and

other NPO stakeholders may lose trust in the ability of NPOs

to deliver needed services and fulfill their missions if execu-

tive compensation levels are too high (Balsam & Harris,

2013). Indeed, Frumkin and Keating (2010) have argued that

“excessive nonprofit salaries or diversions of resources away

from services to outside parties or employees can undermine

public confidence, hurting not only nonprofit organizations

and their clients, but also the sector as a whole” (p. 280).

Despite these mixed findings, overall, this research has

helped scholars and practitioners better understand how

NPO revenue structure potentially affects various organiza-

tional outcomes. What this research has not provided is an

understanding of how variation (or, lack thereof) in NPO

revenue structure affects the decisions that NPOs make

regarding their budget allocations—particularly when those

budget allocations may be limited depending on the funding

source(s).

The legal guidance about how some NPOs should allocate

their spending is often open to interpretation, especially for

smaller NPOs, and these organizations are given great lee-

way when setting up their spending patterns. However, for

some larger nonprofits such as hospitals and higher educa-

tion institutions, there tends to be a plethora of legal guid-

ance, and these organizations often have professional staff

who can provide them guidance. As such, legal guidance for

NPOs may come in different forms and there are no universal

restrictions for how NPOs should make budget allocation

decisions.

Scholars have begun to empirically test whether specific

combinations of revenue can better enable NPOs to pursue

their missions, while still remaining administratively sound

and fiscally secure. The findings, though, have been largely

inconsistent. On one hand, nonprofit finance research has

shown that diversified (as opposed to concentrated) revenue

is associated with improved program outcomes (Chang &

Tuckman, 1994) and increased revenue stability (Mayer,

Wang, Egginton, & Flint, 2012). Other evidence, on the other

804562ARPXXX10.1177/0275074018804562The American Review of Public AdministrationShon et al.

research-article2018

1School of Public Affairs and Administration, Rutgers University–Newark,

NJ, USA

Corresponding Author:

Madinah F. Hamidullah, School of Public Affairs and Administration, Rutgers

University–Newark, 111 Washington Street, Newark, NJ 07102, USA.

Email: mfhamidu@rutgers.edu

Revenue Structure and Spending Behavior in

Nonprofit Organizations

Jongmin Shon1, Madinah F. Hamidullah1, and Lindsey M. McDougle1

Abstract

Nonprofit organizations (NPOs) rely on multiple funding sources to meet organizational needs; and, heavy reliance on any

one revenue source can limit an NPO’s ability to allocate funding. As such, in this study, we examine the association between

funding source and spending behavior in a national sample of NPOs from 2008 to 2012. Our sample consists of 51,812

observations from 16,035 unique NPOs. Using Tobit maximum likelihood estimation, we find that NPOs that rely on, both,

restricted and nonrestricted revenue sources are more limited in their ability to spend on administrative needs, whereas

donation income restricts personnel spending of compensation. Revenue diversification, though, can help NPOs overcome

this limitation and can provide NPOs with greater spending flexibility. Our findings also show, however, that these results

differ for NPO hospitals and universities.

Keywords

nonprofit spending behavior, resource dependence theory, restriction on revenue source