I recently received a media kit from nonprofit management professional/consultant/author Ron Mattocks for his book Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength. Such a timely topic.
According to Mattocks, even before the events of the past several weeks, "500,000 nonprofits operate in the zone of insolvency" and "1 out of 15 nonprofits may be totally insolvent."
Insolvency is generally defined as the condition of having more liabilities than assets. Cash flow insolvency is the condition where debts cannot be paid as they become due. Mattocks defines the zone of insolvency as "a period of financial distress where reasonable people could at least foresee the possibility of total insolvency." Where for-profit organizations enter into the zone of insolvency, members of the governing body may owe duties to credit holders as well as to the shareholders.
For nonprofits, "[t]he legal responsibilities of the board governing an organization in the Zone of Insolvency are expanded from a fiduciary responsibility to protect the assets of the corporation to a broader role of balancing all interests of all parties of the corporation ... [and] this requires balancing the interests of all stakeholders, creditors, funders, customers, and the community at large."
Mattocks lists three ways out of the zone of insolvency:
- A financial turnaround
- A merger
"The board that chooses the financial turnaround must understand the risks, the resource requirements, and reasonable timelines. The board that cannot accept the risk associated with a financial workout should opt for a merger or dissolution."
Learn more about the book and its author here.
Read Part Two of this post here.