The Relationship of Nonprofits’ Financial Health to Program Outcomes: Empirical Evidence From Nonprofit Arts Organizations

Abstract

Financial measures are routinely used as a proxy for nonprofit organizations’ capacity to serve, but the link between financial indicators and program outcomes has been largely unexamined. This study examines empirically whether, and to what extent, financial measures predict program success. The analysis draws on a unique data set from the Cultural Data Project (2004-2012) that covers nearly 5,000 nonprofit arts and cultural organizations. The empirical results confirm that financial attributes are indeed linked to program outcomes. Yet, some of the factors that contribute to financial stability and efficiency have no or negative relationships with program outcomes; this finding suggests that some efforts to maintain financial strength may be made at the expense of program performance. This study also draws attention to the inconsistent way revenue diversification is being measured and calls attention to the value in focusing on the primary funding mechanism of a nonprofit organization.