Summary: In this post, we present our plan to analyze financial information on service providers and enablers of research and scholarship. We propose to analyze financial health using ratio analysis. This assessment is expected to provide information on the conditions of the sector and identify the areas that would benefit from reinforcement. We also plan to host a community discussion session to continue the conversation on financial health matters within the sector.

Invest in Open Infrastructure (IOI) is dedicated to improving funding and resourcing for open technologies and systems that support research and scholarship. To achieve this mission, we work to better understand the financial health of nonprofit providers and enablers in this space. We aim to clarify sector needs for both funders and providers in order to better allocate resources.

To assess the financial health of nonprofits we are exploring tools to make sense of the financial information available publicly online. Financial ratio analysis is a frequently-used, powerful tool to assess the financial health of organizations and identify the areas that would benefit from reinforcement.

Focus and Data Sources

In terms of the data, we selected 19 non-profit providers and entities that serve the research and scholarly ecosystem via their offerings and services. This is a snapshot of the space, with providers and entities that are incorporated under the 501(c)(3) or 501(c)(6) provisions of the US Internal Revenue Code as charitable organizations (see Appendix 1 for the list of organizations; this list is subject to change, we will be keeping it up-to-date).  While this confines our analysis to only those providers under obligation to report their financial information to taxing authorities in the US, it provides a useful prototype of analysis we hope to extend to providers operating in other tax jurisdictions in other legal forms around the world by establishing a baseline of comparison. To have an overview of the conditions of the sector, we plan to restrict the analysis from 2011 to 2019.

Our primary data source will be the financial information reported by nonprofit organizations on US Internal Revenue Service (IRS) Form 990 and Form 990-EZ. As legal filings, we assume the financial disclosures on the IRS Form 990s are accurate representations of their financial condition. We identify organizations by Employer Identification Number (EIN) and use digitized aggregated Form 990 data from Candid/Guidestar and the Urban Institute. To ensure the information is accurate, we will conduct a random review comparing digitized aggregated data with the information reported by organizations in Form 990.

Why we’re looking at nonprofit organisations

In the US, we often speak about the link between “open” organizations and not-for-profit incorporation. This analysis examines a selection of nonprofit organizations serving the scholarly research and open science ecosystem, including open infrastructure providers, open-access publishers, organizations that support the persistent identifier and Handle.Net Registry, and community organisations. We have selected this sampling based on data availability (given their public filings) to prototype our analysis. We recognize that there are other models for open infrastructures, such as public benefit corporations, fiscally sponsored projects, and institution-housed projects. This initial analysis helps us test out our methodology which we aim to apply in a more targeted way to open infrastructure projects – beyond those listed below and extending to those incorporated in non-US jurisdiction – in the future.

Analysis: Financial Ratios

For the selection of ratios, we are exploring the group of indicators that best help to diagnose the financial conditions of the sector and its sustainability in the short and long terms. Financial ratios are usually organised on the basis of the desired outcome. The main groups of ratios are solvency, liquidity, profitability, and margin. Other ratios focus on identifying the balance between expenses and revenue. Table 1 shows the financial ratios to be used for the analysis. In Table 2, we elaborate on the definitions of the inputs required to conduct the financial assessment.

Table 1. Financial ratios to assess the financial health of nonprofit organizations

Ratio
 Goal
Formula
Broad principle
Needs attention if
Days cash on hand Determines the amount of cash the organization has in the bank with how many days that cash will last at the organization's daily spending rate. Cash/ (Total Expenses/365) >90 <90
Leverage ratio Measures how heavily leveraged an organization is or how much an organization relies on debt. Total Liabilities/Total Assets <0.10 >0.10
Reliance on a revenue source ratio Measures the financial reliance on a single income source. The single largest type of income/Total Revenue <0.50 >0.75
Government reliance ratio Measures an organization’s reliance on governmental funding. Government Revenue/
Total Revenue		 <0.25 >0.75
Contributions reliance ratio Measures an organization’s reliance on contributions. Contributions Revenue/
Total Revenue		 >0.10 >0.75
Programme service revenue reliance Measures an organization’s reliance on programme service revenue. Programme Service Revenue/
Total Revenue		 <0.60 >0.75
Programme expense ratio Measures the percentage of expenses that an organization is spending on its core mission. Programme Services Expenses/Total Expenses >0.75 <0.65
Administrative expense ratio Measures the percentage of an organization’s expenses that are being allocated to administrative costs. Administrative Expenses/Total Expenses <0.15 >0.35
Fundraising expense ratio Measures the percentage of an organization’s expenses that are being allocated to fundraising costs. Fundraising Expenses/Total Expenses <0.10 >0.25
Personnel expense ratio Measures the personnel costs of producing revenue. Total Salaries, Wages, and Benefits/Total Revenue <.20 >0.70

Source: Prentice (2016), Sanchez (2021), Ittelson (2017), and Covens (2020)

Table 2. Required data inputs for financial analysis 2011-2019

Data points
 Description
Reported in Form 990 in
Contributions Revenue The sum of cash and noncash amounts received as voluntary contributions, gifts, grants, or other similar amounts from the general public, governmental units, foundations, and other exempt organizations Part I, Line 8
Government Revenue The sum of revenue that comes from grants and contributions from the government Part VIII, Line 1e
Programme Service Revenue The sum of revenue that comes from the provision of services Part I, Line 9
Total Revenue The sum of all the revenue of the organization Part I, Line 12
Total Assets The sum of everything the organization owns Part I, Line 20
Total Liabilities The sum of all financial obligations of the organization Part I, Line 21
Programme Services Expenses The sum of expenses for direct and indirect costs related to providing the organization's programmes and services Part IX, Line 25, Box B
Administrative Expenses The sum of expenses that are not identifiable with a specific programme or fundraising
activity, but are normally indispensable to the organization's continued existence		 Part IX, Line 25, Box C
Fundraising Expenses The sum of expenses for fundraising costs Part IX, Line 25, Box D
Personnel Expenses The sum of expenses allocated for salaries, wages, benefits, and associated taxes on payroll Part I, Line 15
Total Expenses The sum of all the money spent by the organization Part I, Line 18
Cash Cash the organization has in the bank (not including savings and temporary cash investments) Part X, Line 1

Source: IRS (2021), Ittelson (2017)

Per each ratio, we are exploring and documenting broad principles and the ratio ranges that may indicate how an organization is performing and any particular areas of concern that should be addressed. We have found useful guidance in Kiotos' (2015) lecture on desired ratio thresholds and Sanchez' (2021)' recommendation on foundations and nonprofit financial agencies. We are also exploring additional sources that help to support our determinations and will be reviewing the analysis to determine the best means of releasing this data to support solution-oriented conversations that help the growth and development of these organizations.

Limitations of Our Sources and Method

We recognize the potential limitations of our analysis. First, the assessment will focus on U.S.-based organizations. This means that the experiences of funders and non-U.S. organizations will not be part of the analysis– which may limit our understanding of the conditions of the sector as a whole. Second, the assessment will not document the financial challenges that organizations experienced during the COVID-19 pandemic. We know that several funders shifted funding priorities to health services and therefore funding for nonprofits in research and scholarship may have decreased (United Nations, 2021; Tsega et al., 2020). However, due to processing delays due to the COVID-19 pandemic (see IRS Notice 2020-23 for information on this), the most recent financial information available online isn’t currently available after 2020. Third, ratio analysis provides only a partial representation of the conditions of the sector. Financial analysis should be interpreted carefully as other organizational and environmental conditions are also critical in assessing the performance of the sector.

The Products to Come

We are excited to start shedding light on the current financial health of nonprofit enablers and providers and for the opportunities that this analysis will bring. As we analyse the financial information of the sector, we are also exploring effective ways to communicate our findings. We hope to learn from prototyping this analysis, and to use the results and lessons learnt here to inform the design of products to come, e.g. the next release of the Catalog of Open Infrastructure Services.

Ongoing Questions

This study follows previous explorations of the financial performance of the sector. For instance, we have documented the available data to assess the funding for open infrastructure and explored the hidden cost of open infrastructure projects. Following up on previous explorations, we are eager to continue the conversation and have proposed questions to reinitiate the discussion:

  • What do you think are the financial strengths of nonprofit organizations in research and scholarship?
  • What do you think are the financial weaknesses of nonprofit organizations in research and scholarship?
  • In addition to revenue scarcity, what do you think are the main financial challenges of the research and scholarship sector?

Join our community discussion

We will be hosting a community discussion session to dive further into these and other questions related to financial health. We will like to invite all nonprofit organizations in research and scholarship, open infrastructure service providers, funders, budget holders, and other financial experts to join us.

Acknowledgement

We would like to thank Dr. Elizabeth Searing at the University of Texas at Dallas for providing an early review of this work.

Social media image by micheile dot com on Unsplash.

Critical Resources

Urban Institute (2022, June 27). NCCS Core Files. https://nccs-data.urban.org/data.php?ds=core

Candid/Guidestar (2022, July 6). Candid GuideStar Search. https://www.guidestar.org/search

References

Covens, M. (2020, May 1). What percentage of total expenses should go toward program expenses. North Texas Nonprofit Resources. https://www.northtexasnonprofitresources.org/blog/1090

Internal Revenue Service (IRS) (2021). Instructions for Form 990 Return of Organization Exempt From Income Tax. https://www.irs.gov/pub/irs-pdf/i990.pdf

Ittelson, T. R. (2017). Nonprofit accounting & financial statements: Overview for board, management, and staff. Mercury Group Press.

Kioto, S. (2015). Financial Statement Analysis for Non-Profits. University of Washington.

Prentice, C. R. (2016). Why so many measures of nonprofit financial performance? Analyzing and improving the use of financial measures in nonprofit research. Nonprofit and Voluntary Sector Quarterly, 45(4), 715-740.

Sanchez, M. (2021, May 12). Nonprofit Ratios: How to Use Them and What They Measure for Your Organization. Warren Averett. https://warrenaverett.com/insights/nonprofit-ratios/#:~:text=The%20higher%20the%20ratio%2C%20the,every%20dollar%20of%20current%20liabilities.

Tsega, M., Giantris, K., & Shah, T. (2020, June 1). Essential Social Services Are Struggling to Survive the COVID-19 Crisis. The Commonwealth Fund. The Commonwealth Fund. https://www.commonwealthfund.org/blog/2020/essential-social-services-are-struggling-survive-covid-19-crisis

United Nations (2020, February 8). Commission for social development fifty-ninth session, 2nd meeting (AM & PM) [Press release]. https://www.un.org/press/en/2021/soc4890.doc.htm

Appendix 1. List of entities under analysis

Number EIN Legal Name Also known as Type
1 941156476 Annual Reviews 501(c)(3)
2 461496217 Center for Open Science 501(c)(3)
3 043502255 Publishers International Linking Association Crossref 501(c)(6)
4 453588477 Elife Sciences Publications eLife 501(c)(3)
5 260389639 Fedora Commons Duraspace 501(c)(3)
6 452677817 Hypothes Is Project Hypothesis 501(c)(3)
7 522065453 International Doi Foundation 501(c)(6)
8 461599252 Impactstory Our Research 501(c)(3)
9 133857105 Ithaka Harbors ITHAKA 501(c)(3)
10 231365979 LYRASIS 501(c)(3)
11 454547709 NumFOCUS 501(c)(3)
12 275142743 Orcid ORCID 501(c)(3)
13 680492065 PUBLIC LIBRARY OF SCIENCE PLOS 501(c)(3)
14 461685419 Dryad 501(c)(3)
15 463871312 CHOR CHORUS 501(c)(3)
16 814921243 Asapbio ASAPbio 501(c)(3)
17 521447747 Corporation for National Research Initiatives 501(c)(3)
18 814396672 Open Library Foundation 501(c)(3)
Posted by Tania Hernandez