Financial Efficiency In the Nonprofit Sector: An Analysis of Factors Affecting Expense Ratios of Kentucky Nonprofits

Statement of Problem Recent events in both the public and private sectors have lead to an environment of mistrust and caution surrounding the way organizations are managed and funds are handled. For the nonprofit sector, this has led to an emergence of charity rating or watchdog organizations and increased scrutiny of finances. Individual donors, charity rating agencies, and funding institutions have begun using expense ratios as a measure of financial efficiency. Decisions on the financial efficiency of organizations are being made without a good understanding of what factors affect these ratios. Research Questions The purpose of this paper is to answer the following questions: Do regional and organizational characteristics affect nonprofit administrative expense ratios? Do regional and organizational characteristics affect nonprofit fundraising expense ratios? Methodology A simple random sample (n=200) was conducted of nonprofit organizations within Kentucky filing IRS Form 990 Returns in the 2000 tax year. The data were analyzed using Intercool Stata 8 to calculate frequency distributions, summary statistics, a correlation matrix, and multiple regressions. Results The analysis found the age of an organization and six National Taxonomy of Exempt Entities categories to be statistically significant in affecting change in administrative expense ratios. The regression model as a whole was significant at the 95% confidence level and explained 19% of variation in the dependent variable. The analysis found no variables statistically significant in affecting change in fundraising expense ratios. The model itself was not statistically significant and explained only 5% of variance in the dependent variable. Conclusion and Recommendations From this analysis it is concluded that further research is needed to understand what factors affect expense ratios and the financial efficiency of nonprofit organizations. It is recommended for future studies that: (1) a larger sample size be used, (2) less aggregated data (county demographics instead of region) be used to increase statistical power, (3) a stratified random sample be used in order to better represent counties/regions that have fewer nonprofit organizations, and (4) variables be included in the regression model that capture characteristics internal to an organization