Signals of Financial Sustainability: Exploring Organizational and Board Factors as Correlates of Having Endowment Reserves and Conducting Audits for Three Types of Smaller Arts-oriented U.S. Nonprofits

Abstract

When deciding to support nonprofits, donors value evidence of financial sustainability, including direct evidence in the form of financial audits and endowment reserves (ER). Using a signaling theory framework, we explore the relationships between ER and audits, on the one hand, and organizational and board attributes—specifically, organization age, organization size, board size, percentage of board-contributed operating funds, and average board volunteer hours—that might serve as indirect signals of financial accountability and sustainability. We tested our predictions using a sample of 458 small arts-oriented U.S. nonprofits from three sub-sectors—Support/Advocacy/Community (SAC), Arts Education (AE), and Museums. We found that ER and audits are correlated but independent measures of financial sustainability, and that the association between these indicators of financial health and organizational and board attribute signals varies across the three sub-sectors. More specifically, board size was associated with both audits and ER for the SAC segment and with audits for the AE segment. For museums, the segment within our system with more mature and slightly larger (but still small) organizations, organizational age was associated with both ER and audits, and the percentage of board members’ contributing to funding was associated with ER. These findings provide practical insight for funders and nonprofit leaders about the organizational and board attributes that signal financial sustainability and suggest several avenues for additional research into the contingency, evolution, and interactivity of signals of nonprofit financial health.