The Dangers of Assessing the Financial Vulnerability of Nonprofits Using Traditional Measures

• Author: Pablo de Andrés‐Alonso,M. Elena Romero‐Merino,Iñigo Garcia‐Rodriguez
• Published date: 01 June 2015
• Date: 01 June 2015
• DOI: http://doi.org/10.1002/nml.21134

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N M  L, vol. 25, no. 4, Summer 2015 © 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/nml.21134

Journal sponsored by the Jack, Joseph and Morton Mandel School of Applied Social Sciences, Case Western Reserve University.

Correspondence to: Iñigo Garcia-Rodriguez, Autonoma University of Madrid, Faculty of Economics and Business

Administration, Department of Finance and Marketing Research, C/ Francisco Tomás y Valiente, Campus Cantoblanco

28049 Madrid, Spain. E-mail: inigo.garcia@uam.es.

 e Dangers of Assessing the Financial

Vulnerability of Nonprofi ts Using

Traditional Measures

THE CASE OF THE NONGOVERNMENTAL DEVELOPMENT

ORGANIZATIONS IN THE UNITED KINGDOM

Pablo de Andrés-Alonso,1 Iñigo Garcia-Rodriguez,1 M. Elena Romero-Merino2

1Autonoma University of Madrid, 2University of Burgos

This article analyzes the financial vulnerability of 228 British nongovernmental devel-

opment organizations (NGDOs) during the period 2008–2012. To do this, we use the

Financial Vulnerability Index developed by Trussel et al. (2002). This index is commonly

used in the literature on nonprofit organizations. However, we observe a very poor adapta-

tion of the index to the reality of this industry, at least in predictive terms. The article goes

deeply into each of the variables that are used to calculate this index, and we offer explana-

tions of their inadequacy to this subsector of nonprofits.

Keywords: financial vulnerability, nonprofit, development cooperation, United

Kingdom

WE THANK THE SPANISH MINISTRY OF ECONOMY AND COMPETITIVENESS for

funding this research (Project ECO2012–32554). We appreciate the helpful comments

of former editor Duncan V. Neuhauser, two anonymous reviewers, and participants at the

XXIV National Congress of ACEDE and the XV Congress of CIRIEC-Spain.

Corporate fi nancial diagnosis has been exhaustively studied, especially since the work of Alt-

man (1968). Academicians have repeatedly attempted to fi nd suitable models to predict,

fi rst, corporate bankruptcy (Altman 1968; Ohlson 1980) and, afterward, fi nancial distress

( Frydman, Altman, and Kao 1985; Zmijewski 1984). However, fi nancial vulnerability of

nonprofi t organizations has been ignored by the academic literature until the ’90s. Since

then, the great economic growth of this sector and, most important, the several fl uctuations

of the global economy have led to the need to take into account this topic in the nonprofi t

sector also. Because of the lack of data on nonprofi t bankruptcies, the fi rst challenge was to

defi ne when a nonprofi t is considered fi nancially vulnerable.

In 1991, Tuckman and Chang elaborated a model to evaluate nonprofi ts’ fi nancial problems.

After them, authors such as Trussel and Greenlee have tried to develop predictive models to

detect in advance potential fi nancial problems without reaching conclusive results (Greenlee