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FACULTEIT ECONOMIE EN

Internally Organised Masters Thesis

BEDRIJFSWETENSCHAPPEN

Financial vulnerability

of nonprofit

organizations

The health care sector in Belgium

Simon GEVCEN

Masters Thesis Submitted for the Degree of

Master in International Business Economics and Management

Supervisor: Sandra VERBRUGGEN

Academic Year: 2014-2015

Defended in June 2015

WARMOESBERG 26 B 1000 BRUSSELS BELGIUM

FACULTY ECONOMICS

AND BUSINESS

CAMPUS BRUSSELS

MASTERS THESIS

Financial vulnerability of nonprofit organizations

The health care sector in Belgium

Simon GEVCEN

Abstract

Whether an organization is for-profit or nonprofit, its financial vulnerability is a concern for its

management. The common denominator between both types of organizations is the harm that a

financial distress can have on their ability to provide constant services. However, nonprofits are not

for-profit, which implies that the models describing the financial vulnerability of the for-profit sector

cannot be literally transposed to nonprofit organizations. Indeed, new models have been designed

for the nonprofit sector. Therefore, this article intends to summarize all the models assessing the

financial vulnerability of the nonprofit sector.

Throughout the past ten years, scholars pointed out the weaknesses of the Belgian health care

nonprofit organizations, generally described as financially vulnerable. However, the literature backing

this statement is weak. Inexistent, perhaps. In fact, no statistical research nor any empirical study

supporting this statement has been conducted yet. Therefore, this article describes the first empirical

investigation on the nonprofit sector in Belgium in order to assess the variables affecting its financial

vulnerability in the period 2010-2013. Relying on longitudinal data about human health

organizations, residential care organizations, and social work organizations, this study determines

the significance of continuous and categorical predictors as determinants of the financial vulnerability

of nonprofit organizations in this health care segment of the Belgian nonprofit sector.

Acknowledgments: I express my faithful thanks to Pr. Sandra Verbruggen for her support and

guidance throughout the achievement of this Masters thesis.

Keywords: financial, vulnerability, performance, exposure, distress, ratios, nonprofits, nonprofit

organizations, health care, Belgium.

Introduction

Financial vulnerability is the potential exposure of an organization facing financial distress, which is

a common situation for many nonprofit organizations (Wang & Liu, 2010, p. 463). According to

Tuckman & Chang (1991), the nonprofit sector has been in the shadows for a very long time (p.

459). Although the academic community started to address the topic only recently, researchers have

given increased attention to the topic of vulnerability and organizational demise (Hager, 2001, p.

376) in the past fifteen years.

We can identify four reasons explaining the lack of research on this topic, which can then be seen as

a priori limitations that bounded the previous investigations. First, a generally accepted definition of

a nonprofit organization is lacking. Second, the economic weight of the nonprofit sector remains

marginal although it is getting more importance over time at an increasing rate (Banque Nationale

de Belgique, 2004, p. 9). Third, researches do not always have all necessary data because little

information is available to inform the general public (Tuckman & Chang, 1991, p. 449). Fourth, the

literature did not end up on a one-fit-all methodology regarding the study of nonprofit organizations.

However, the lack of research does not mean a lack of interest. In his article, Trussel (2002) noted

that whether or not a nonprofit organization is susceptible to financial problems is a concern of all

stakeholders of the organization, because financial problems might not allow an organization to

continue to meet its objectives and provide services (p. 17). Since some organizations close as a

result of financial distress (Tevel, Katz, & Brock, 2014, p. 4), this concern is of interest. In fact, our

study shall attract the attention of many types of agents including managers during the process of

strategic planning, government bodies setting policies, auditors conducting review studies, donors in

the decision-process for their contribution, and potential creditors in determining credit-worthiness

of charitable organizations (Greenlee & Trussel, 2000, p. 209).

Thus, the research question to which we intend to answer at the end of this research is the following:

What are the variables affecting the financial vulnerability of the Belgian health care nonprofit

organizations between 2010 and 2013? Throughout the process of this study, the core research

objective is to determine to what extend certain parameters of an NPO1 can determine its financial

vulnerability2, since the latter can harm any NPO in its ability to deliver its social objective (Arshad,

Bakar, Razali, & Omar, 2013, p. 408). In their pioneer study, Tuckman & Chang (1991) stressed

three reasons to investigate on this field.

First, the nonprofit sector is growing rapidly over time (Tuckman & Chang, p. 446). As it continues

to grow, the demand for accounting services by these organizations will increase (Trussel, Greenlee,

& Brady, 2002, p. 66). In fact, NPOs remain key players in the Belgian economic landscape (Vander

Donckt & Rigo, 2013, p. 11) with respect to their contribution of more than 5% to the wealth of the

country. Given the importance of this sector, it is of interest to study its financial vulnerability since

the Belgian nonprofit sector is not only one of the largest in Europe but is also a product of the []

welfare state model (Mertens, et al., 1999, p. 43).

Second, the impacts of the nonprofit sector on employment is substantial as it affects a large number

of people (Tuckman & Chang, 1991, p. 446). Its contribution to the countrys employment is about

11.9% in 2010 and reflects the labor-intensive nature of production (Vander Donckt & Rigo, 2013,

p. 11). This support improved during the period 2010-2013 with an increasing number of people

employed in that sector, as shown in Appendix 1. Given the importance of this sector, it is of interest

to study its financial vulnerability since it has considerable effects both on employment [] and on

the institutions that train people for employment (Tuckman & Chang, 1991, p. 446).

Third, the revenue sources of the nonprofit sector is a key factor to analyze the ability of a nonprofit

organization to respond to financial pressures (Tuckman & Chang, 1991, p. 446). NPOs generate

most of their revenue from sales of goods and services as well as from current transfers (Vander

Donckt & Rigo, 2013, p. 12). However, public funding is the major source of revenue for NPOs. In

fact, more than half of the public funding going to the nonprofit sector goes to the healthcare sector

(Vander Donckt & Rigo, 2013, p. 12). Table 1 shows the percentage distribution of the public funding

to the nonprofit sectors in Belgium by sector of activity in 2010.

1

2

Abbreviated as FV.

2,6

11,5

1,5

28,5

Services

Education

Human health

Social action

Arts, spectacles, and recreational activities

1,7

54,2

A specific focus on this third element can be a starting point to our study. Actually, the diversity of

revenue sources can show some instability, and this instability in the donor base can emanate from

several sources (Tuckman & Chang, 1991, p. 447). Three changes can occur and cause distress in

the sources of revenues for NPOs. The first change concerns the donors preferences: the taste of

donators can vary when deciding which nonprofit to fund over certain periods. The second change

concerns the economy: if the economic situation of donators income is getting worse, donations

may be among the first discretionary items that donors cut (Tuckman & Chang, 1991, p. 447). The

third change concerns the tax law: tax regulation affects the net contribution of a donor.

Consequently, NPOs experiencing revenue instability are more likely to remain financially

vulnerable compared to those not experiencing it.

With respect to this research background, the contribution of our study is twofold. The first

contribution has regard with the application to the Belgian nonprofit sector of some models presented

in this article. In fact, a thorough review of the literature on the financial vulnerability of Belgian

NPOs leads to the conclusion of a complete lack of research in this area. Many roads are then open

for our investigation. Despite the publications of some authors with regard to the financial

vulnerability of NPOs in general, further research needs to expand the knowledge of this field in

Belgium. In fact, the Belgian health care nonprofit sector is generally said to be financially vulnerable,

without any statistical basis. Therefore, with the development of this Masters thesis, our contribution

intend to be the basement of the empirical literature on the Belgian health care nonprofit sector.

The second contribution has regard with the methods. Although the models developed in the

business sector are often inappropriate for organizations whose purpose is to maximize service rather

than profit (Trussel, Greenlee, & Brady, 2002, p. 66), Wang & Liu (2010) noted that the consensus

of how to measure the financial performance for non-profit organization has not been reached among

scholars (p. 463). This view is shared by McIndoe & Sullivan (2014) who noted that meanwhile

there is no consensus on a single indicator of nonprofit financial health, examining several financial

ratios simultaneously has emerged as a common practice to assess the relationship between

measures of nonprofit financial vulnerability and important outcomes such as survival (p. 3).

Therefore, with the development of this Masters thesis, our contribution intend to adapt models

presented in the literature review to the health care sector of the Belgian nonprofit sector.

In spite of the attention given by experts to the nonprofit sector, this segment of the economy is

relatively unknown. The shortage of statistical data did not allow researchers to optimize its study.

However, the Johns Hopkins University located in Baltimore, United States, coordinated the biggest

project ever launched regarding the nonprofit sector at the world stage, known as the Comparative

Nonprofit Sector Project (Mertens, 2004, p. 44). This project lead to the publication of a fundamental

handbook by the United Nations (2003) giving to all institutions in charge of national accounts the

incentive to create a Satellite Account of Institutions without Profit Purpose 4 (Mare, 2010a).

3

4

In French, Compte satellite des institutions sans but lucratif. In Dutch, Bijkomende rekening van de instellingen zonder winstoogmerk.

A satellite account is a set of structured and coherent data, regarding a particular field, and

established in coherence with the central framework of the national accounts of the country (Banque

Nationale de Belgique, 2010, p. 3) to offer statistical data and macroeconomic information (Mare,

2010b). Indeed, this handbook recommends statistical standards and guidelines for the

development of data on non-profit institutions (United Nations, 2003, p. iii).

Following the recommendation of Eurostat (Mare, 2010c), Belgium has been one of the first

countries (Acx, Rigo, & Vander Donckt, 2011, p. 5) to publish in early 2004 his satellite account. For

the case of Belgium, this satellite account is managed by the Institute of National Accounts 5, which

is the body in charge of the annual release of data regarding the Belgian nonprofit sector (Banque

Nationale de Belgique, 2012, p. 3). Actually, in order to be considered in Belgium as an institution

without profit purpose, entities must comply with all the following criteria:

Be recognized : as organization with an institutional existence,

Be private : institutionally separate from the State,

Be independent : have its own rules and decision-making bodies,

Be open : membership is open and the entity is able to collect voluntary resources in the form

of donations and volunteering (Mare, 2010a).

The process of gathering all institutions without profit purpose does not require considering all of

them as a homogeneous group. (Banque Nationale de Belgique, 2004, p. 12). The set of these

institutions are divided in two modes: institutional segmentation, and sectorial segmentation.

First, regarding the institutional segmentation shown in Table 2, the Belgian legislator recognizes

many types of organizations. However, our research focuses on certain specific types of

organizations. In fact, the most important category is the association without profit purpose, which

consists of at least three persons, either nationals or foreigners, with the purpose of realizing a nonlucrative objective (Portail Belgium, 2012). It is entitled to obtain the legal personality if it releases

its articles in the Belgian Official Journal 6 and registers its activities in the Crossroads Bank for

Enterprises7.

Table 2. Institutional segmentation of NPOs

A. Without legal personality

- De facto association8 refers to any gathering of people, which does not require any legal

recognition by the legislator.

B. With legal personality (27 June 1921 Law, modified by 2 May 2002 Law)

- Public utility institution9 refers to any association known both as foundations and as

professional unions (Banque Nationale de Belgique, 2004, p. 14).

- Association without profit purpose10 refers to any association that is not devoted to

industrial or commercial operations and which does not seek to obtain material

gains for its members (Mertens & Lefbvre, 2001, p. 8).

- International association without profit purpose11 refers to any association that fits with the

requirements of the association without profit purpose, but that is furthermore

pursuing a nonprofit purpose of international utility.

Source : (Mertens & Lefbvre, 2001, p. 8; Mare, et al., 2005, p. 11)

In French, Institut des comptes nationaux. In Dutch, Instituut voor de Nationale Rekeningen.

In French, Moniteur belge. In Dutch, Belgisch staatsblad.

7

In French, Banque-carrefour des entreprises. In Dutch, Kruispuntbank van Ondernemingen.

8

In French, Association de fait. In Dutch, Feitelijke vereniging.

9

In French, Etablissement dutilit publique. In Dutch, Instelling van openbaar.

10

In French, Association Sans But Lucratif (ASBL). In Dutch, Vereniging Zonder Winstoogmerk (VZW).

11

In French, Association internationale. In Dutch, Internationale associatie.

6

Indeed, the legislation regulates the boundaries of this non-lucrative objective. It prevents it from

pursuing an objective of enrichment. Hence, the organization is not mandated to retain any minimum

capital, nor allowed to redistribute benefits made from the organization activities to its members,

neither allowed to aim to make profit although fees membership can be charged (Service Public

Fdral Justice, 2013). Since it operates as a nonprofit entity, it is subject only to the income tax

on legal entities (Business Belgium, 2010). However, the application of the corporation tax is

immediate if subsequent investigations reveal a profit seek of the organization.

Second, regarding the activity sector segmentation shown in Table 3, its classification rely on the

European Nomenclature for Economic Activities12 13 that is a reference framework for the production

and release of statistical data regarding economic activities in Europe. Furthermore, we can also look

at the value added of each sector to the overall sector of IWPP.

Table 3. Distribution of the IWPP added value, by sector of activity (2010)

11

13

2

Services

Education

Human health

Social action

33

36

Source : (Vander Donckt & Rigo, 2013, p. 20)

Furthermore, Appendix 2 shows the importance of these activities regarding their level of

employment in 2010. From the total number of employed units, about half is allocated to only two

activities social action, and human health. In fact, these two categories are those that account for

most of the job creation with respectively 9% and 5.8%. Although both of them are of interest for

this study, a specific research focus has to be selected. Therefore, the research focus our study will

be on the human health segment of the nonprofit organization sector.

Literature review

This literature review intends to give an overview of the most important models developed both in

the for-profit perspective and in the nonprofit perspective. The former has seen the emergence of

two models: Altman (1968) model, and Ohlson (1980) model. The latter has seen the rise of three

models: Program Expenditure Model with two extensions, Net Assets Model, and Net Earnings Model.

The for-profit sector is of interest because all models rely on accounting measures. In fact, most of

them focus on one factor: corporate bankruptcy. Actually, they mainly use profitability, cash flow,

and leverage ratios as predictor variables (Keating, Fischer, Gordon, & Greenlee, 2005, p. 4). In the

1960s, this area of research became popular. At that time, Altman (1968)s model appeared to be

the most influential study in the field of predicting corporate failure (Bukhori, Othman, Aris, &

Omar, 2013, p. 375) based on the event of bankruptcy (Ohlson, 1980, p. 109), which relies on a

Z-Score based on five variables that had the highest predictive power (Keating, Fischer, Gordon, &

Greenlee, 2005, p. 4). Actually, five financial ratios determine the Z-Score. In practice, the lower the

Z-Score, the higher the probability of bankruptcy. Nowadays, academics and practitioners still widely

use the Z-Score as its accuracy reached 95% (Karamzadeh, 2013, p. 2008).

12

13

Abbreviated as NACE-Bel.

The next generation of studies on corporate bankruptcy prediction include Santomero & Vinso (1977),

Ohlson (1980) and Zmijewski (1984). However, Ohlson (1980) is the most widely used and cited.

His model is made for the probabilistic prediction of bankruptcy among industrial firms (Tevel, Katz,

& Brock, 2014, p. 6). Actually, his one-year prediction model relies on an O-Score, determined by

the combination of results to these six factors. His study concluded that it could indicate at what

point in time a companys financial statements were released to the public, and one could therefore

check whether the company entered bankruptcy prior to, or after the date of release of the financials

(Pongsatat, Ramage, & Lawrence, 2004, p. 3). Since his model could accurately predict corporate

failures, his model was used since then in thousands of studies, with or without variations, including

in the context of nonprofit organizations (Tevel, Katz, & Brock, 2014, p. 6). Consequentely, with

regard to the accuracy of these two models, their popularity are reflected in the frequent use of the

two models as empirical proxies for bankruptcy risk in accounting research (Keating, Fischer,

Gordon, & Greenlee, 2005, p. 5).

Before the nineties, most of the studies focused on the for-profit perspective. However, the lack of

research regarding the financial vulnerability of the nonprofit sector was enormous. For the purpose

of this study, we do not take into account the for-profit models as basis since, despite some authors

assurances, those models came out to be not suitable for the analysis of nonprofit organizations

(Tevel, Katz, & Brock, 2014, p. 11).

In 1991, a first model appeared. In fact, Tuckman & Chang (1991) were the first to focus on the

interest of this research, in which they defined an NPO as financially vulnerable if it [is] likely to cut

back its service offerings immediately when it experiences a financial shock (p. 445). A financial

shock can be for instance an economic recession with the potential consequences it includes, e.g.

the withdrawal of a major donor from the list of donators. Those NPOs that are not financially

vulnerable may not directly cut their service offerings.

Their study stated that the factors defining an NPOs financial situation are the generosity of its

supporters; the adequacy, stability, and diversity of its revenues; the quality of its management; its

capacity to withstand revenue fluctuations; and the size of its capital (Tuckman & Chang, 1991, p.

445). Based on these factors, they generate a model to measure an NPOs financial vulnerability.

This model proposes four criteria for judging this financial flexibility (Thomas & Trafford, 2013, p.

632) as shown in Table 4: revenue concentration, low or negative operating margins, inadequate

equity balances, and low administrative costs (Keating, Fischer, Gordon, & Greenlee, 2005, p. 6).

Revenue concentration ratio. An NPO with revenues coming from few resources sources may have

more difficulties to count on alternative sources in case of financial distress, hence being classified

as financially vulnerable. Conversely, those NPOs with large variety of sources of income will

overcome the distress with fewer difficulties.

Operating margin ratio. An NPO with a relatively low or negative level of margins may face more

difficulties to face a financial distress compared to an NPO with relatively higher level of operating

margins. The latter will be able to operate with a reduced operating margin rather than [reducing]

its program offerings (Greenlee & Trussel, 2000, p. 200), hence avoiding its classification as

financially vulnerable.

Equity ratio. An NPO with a low volume of equity relative to the size of its operations (revenues) may

face more difficulties to replace the withdrawal of a major donor from its resources sources after a

financial distress compared an NPO with a relatively higher volume. When the distress occurs, the

latter has the capacity to leverage its assets rather than reduce its program offerings (Greenlee &

Trussel, 2000, p. 200). Hence, the higher the equity balance, the bigger the likelihood the NPO will

not be classified financially vulnerable.

Administrative cost ratio. An NPO with relatively high administrative costs may have fewer difficulties

to face a financial distress compared to an NPO with relatively low administrative costs. If a shock

occurs, the former can cut more discretionary costs of its administration than the letter. Therefore,

a higher level of administrative costs reduce the probability of decreasing an NPOs service programs,

hence avoiding its classification as financially vulnerable.

Their methodology relied on a random selection of NPOs usng the U.S. Internal Revenue Service 14.

The four ratios were applied to a 1983 national sample of tax returns filed by 4,730 charitable

nonprofits (Tuckman & Chang, 1991, p. 445). Only organizations that filed this annual Form 990

are included in the study. They divided the results obtained into quintiles, and two categories of NPOs

appeared. On the one hand, an NPO is severally-at-risk if it falls in the lowest quintile for all four

criteria. On the other hand, an NPO is at-risk if it falls in the bottom quintile with respect to any one

of the four criteria (Tuckman & Chang, 1991, p. 451).

Table 4. Financial Vulnerability Ratios by Tuckman & Chang (1991)

Ratios

Formula

Sign

Revenue source j 2

(

)

Total revenues

Total revenues

Total equity

Total revenue

Administrative expenses

Total expenses

Tuckman & Chang (1991) derived some conclusions from their results, including the suggestion that

health care NPOs are among the ones most likely to be impacted by a financial shock (p. 458).

Nevertheless, their study is subject to an important bias linked to the IRS database usage. On the

one hand, as small organizations are underrepresented, it is likely that our study does not fully

capture the financial problems of social services agencies, which tend to be smaller than other

nonprofit organizations (Tuckman & Chang, 1991, p. 458). On the other hand, the study excludes

all those organizations that do not fill the Form 990, which implies the need to design an alternative

model to study the financial vulnerability of those NPOs that do not fil this form. However, their study

did not aim at literally predict future financial vulnerability but to measure an NPOs actual financial

vulnerability. Actually, they did not attempt to see if these variables could predict future financial

distress (Tevel, Katz, & Brock, 2014, p. 4). This desire of prediction is the core of the extensions

made by Greenlee & Trussel (2000) and by Trussel & Greenlee (2001).

1.1.

First Extension

Based on the groundwork of Tuckman & Chang (1991), Greenlee & Trussel (2000) were the first to

use the previously described four accounting ratios as well as methodologies common in the forprofit sector (Trussel, 2002, p. 18) to design a new model able to predict the financial vulnerability

of nonprofit organizations (Wang & Liu, 2010, p. 464). The core of this new model is to establish

measures predicting future financial health rather than identification of past problems (Cordery &

Baskerville, 2010, p. 2).

14

U.S. government agency responsible for tax collection and tax law enforcement (Internal Revenue Service, 2015).

Since the viewpoint changed from measuring actual distress to predicting future distress, a change

of definition became necessary. As noted earlier, Tuckman & Chang (1991) linked the financial

vulnerability to the reduction in program services after a financial shock. However, Greenlee & Trussel

(2000) ignores the immediacy of [this] definition (Thomas & Trafford, 2013, p. 634) and modified

it so that any NPO is financially vulnerable if it saw an overall decline in program expenses during a

three-year period (Keating, Fischer, Gordon, & Greenlee, 2005, p. 6) between 1986 and1995.

From program services to program expenses, two reasons explain the abandon of Tuckman & Chang

(1991)s definition. First, the accounting system does not fully capture program services (Greenlee

& Trussel, 2000, p. 202). Second, it is difficult to determine which charities experienced a financial

shock (Greenlee & Trussel, 2000, p. 202). To simplify the model of Greenlee & Trussel (2000), a

financially vulnerable NPO is one that shows a diminution in its program expenditures for instance in

1993, 1994, and 1995. They measure then the accounting ratios in 1992 to evaluate whether the

model could predict the NPOs actual financial situation in 1995. Therefore, the study uses the four

ratios to determine an NPOs probability to become financially vulnerable.

Table 5. Finanvial Vulnerability Model by Greenlee & Trussel (2000)

Financial Vulnerability Probability

1

(1+ )

Interpretation rules:

Strong indication of financial vulnerability if the probability is higher than 10%.

Strong indication of no financial vulnerability if the probability is lower than 7%.

Caution recommended in classifying NPOs if the probability is between 7% and 10%.

Source: (Cordery & Baskerville, 2010, p. 4)

Table 5 shows the formula defined by Greenlee & Trussel (2000) to compute the financial vulnerability

probability. They designed this formula, based on a sample of 3,151 NPOs from a multi-year database

of the IRS delivered by the National Centre for Charitable Statistics. This sample includes all NPOs

with assets higher than USD 10 million as well as 4,000 random NPOs of small size. Actually, to test

their model, they followed five steps.

First, the model applies the definition of financial vulnerability and divides the set of NPOs in two

groups: one financially vulnerable, and another one not financially vulnerable. Second, it randomly

selects about half of the NPOs of both groups. One will be the model sample to generate a logistic

regression model, and the remaining is used as a holdout sample. The model will test the significance

of the independent variables, with the predefined ratios. Third, it computes the financial vulnerability

probabilities for each NPO by using the actual ratios for each organization in the initial sample

(Greenlee & Trussel, 2000, p. 205). The authors used a binary logistic regression model to predict

the probability whether an NPO is financially vulnerable or not, based on the ratio. Fourth, it classifies

these probabilities and chooses cut-off points, i.e. 7% and 10%, to categorize each NPO as financially

vulnerable or not. Fifth, it computes the same probabilities of each NPO not selected in the second

step, to see if the model developed [] could accurately predict which organizations would become

financially vulnerable (Greenlee & Trussel, 2000, p. 206).

The study noted that CONCEN, MARGIN, and ADMIN are significant in predicting financial

vulnerability, but EQUITY is not. In other words, there is a significant relationship between financial

distress and three of Tuckman & Chang variables (Tevel, Katz, & Brock, 2014, p. 4). Actually, the

model was able to predict correctly 65 percent of the financially vulnerable organizations and 58

percent of all organizations as financially vulnerable or not (Trussel, 2002, p. 19). In addition, this

result was corroborated by the application of the same model to another sample, which gave similar

results the correct prediction of 61 percent of the financially vulnerable organizations and 61

percent of all organizations (Trussel, 2002, p. 19).

Nevertheless, the model assumes any NPO as financially vulnerable if it faces a program expenditures

reduction on a period of three years, but this precludes any determination of financial vulnerability

during the first four years of an organizations existence (Greenlee & Trussel, 2000, p. 207).

Moreover, Greenlee & Trussel (2000) noted that further developments would experiment new

definitions of financial vulnerability, increase the time scale of the model, and increase the sample

population. A revision of the model published by Trussel (2002) covers these further developments.

1.2.

Second Extension

Meanwhile Greenlee & Trussel (2000) designed their first development of Tuckman & Chang (1991)

model, Hager (2000) pointed the difference between the failure of arts NPOs and of the non-arts

NPOs. Indeed, arts NPOs were less likely to survive the study period (p. 4) compared to any other

types of NPOs. Actually, he applied the Tuckman & Chang (1991) model to this arts sector. Therefore,

he relied on the IRS database containing all registered arts organizations to obtain a sample of 7,226

organizations, subdivided in 7 subsectors: Visual arts organizations, Arts museums, Performing arts

centers and schools, Dance organizations, Theatre organizations, Instrumental and choral music, and

Generic performing arts (Hager, 2001, p. 383). Those organizations filed the annual Form 990 tax

return from the IRS for a period of three tax years as all variables are constructed from

organizational finances reported in 1990, 1991, and 1992 (Hager, 2001, p. 380).

Hager (2001) noted that although they showed promise, the financial vulnerability measures derived

by Tuckman and Chang (1991) could not be used across the board to predict failure in performing

arts [] organizations (Cordery & Baskerville, 2010, p. 4). In fact, to various degrees, the ratios

can explain the demise or longevity of a nonprofit organization (Hodge & Piccolo, 2011, p. 523).

He concluded that the four ratios of Tuckman & Chang (1991) are not applicable to all NPOs since

the applicability of these measures may vary across nonprofit sub-groups (McIndoe & Sullivan,

2014, p. 3). Furthermore, the conclusions from Hager (2001) are limited to only arts NPOs. Since

the focus of his study was too narrow, his findings do not appear to have been applied to other

specific areas of the non-profit sector (Cordery & Baskerville, 2010, p. 4). Therefore, although his

study was important to the development of the literature on NPOs financial vulnerability, we do not

rely on his findings in our research.

Considering the limitations of the Program Expenditure Model, this second model was developed by

Trussel (2002), Trussel et al. (2002), Trussel & Greenlee (2004) and is known as the Net Assets

Model. It provided responses to the previous critics. On the one hand, the ratios CONCEN and

MARGIN do not change at all. On the other hand, the author expanded the population of

organizations. Instead of using the IRS Statistics of Income database that is biased toward very

large organizations (p. 21), this model uses the IRS Core Files database, which includes all NPOs

that filled the 990 Form. Therefore, this new database gives a better representation of NPOs.

However, this broader database contains less data, which leads to some remarks. First, missing data

indicates the impossibility to apply some ratios: EQUITY was amended, and ADMIN was abrogated.

Second, the author added new indicators, namely SIZE and SECTOR, as shown in Table 6.

Debt ratio. The former equity ratio is replaced by a debt ratio, measuring the relative amount of

debt that an organization uses to finance its programs (Trussel, 2002, p. 20). An NPO with relatively

more debt may face more difficulties to finance its programs compared to an NPO with relatively less

debt. Therefore, an NPO is more vulnerable to financial distress if it shows a high debt ratio as it will

be limited in its ability to replace these lost revenues (Trussel, Greenlee, & Brady, 2002, p. 66).

Size. An NPOs size is an important factor to determine its likelihood to overcome financial distress.

Indeed, it is more likely to be financially vulnerable if it is small due to factors such as age,

reputation, economies of scale related to costs (Trussel, 2002, p. 20).

10

Sector. An NPOs sector links financial distress to financial capacities. Many macroeconomic factors,

such as inflation or recession, affect NPOs differently. These differences lead the NPO to be more

exposed or less exposed to financial distress, according to the sector it belongs. Trussel (2002)

expanded the model to 10 subsector variables: Arts, culture, and humanities; Education;

Environment and animals; Health; Human services; International, foreign affairs; Public, societal

benefit; Religion-related; Mutual-membership benefit; and Unknown (Trussel, 2002, p. 23).

Table 6. Financial Vulnerability Ratios by Trussel (2002)

Ratios

Formula

Sign

2

Revenue j

(

)

Total revenues

Total revenues

Total liabilities

Total assets

Size (SIZE)

Sector (SECTOR)

N/A

To execute it, the model follows four steps. First, it computes the financial indicators, mentioned in

Table 6, for the last five years. Second, it selects the subsector to which the NPO belongs (in this

case, health care). Third, it compares the financial indicators of the most recent year to the subsector

benchmark. Fourth, it computes the FVI index using the Z equation provided in Table 7 : the higher

the FVI, the greater the likelihood that the organization will have financial problems (Trussel,

Greenlee, & Brady, 2002, p. 68).

Table 7. Financial Vulnerability Model by Trussel (2002)

Financial Vulnerability Index

1

(1+ )

Interpretation rules:

Strong indication of financial vulnerability if the probability is higher than 20%.

Strong indication of no financial vulnerability if the probability is lower than 10%.

Caution recommended in classifying NPOs if the probability is between 10% and 20%.

Source: (Cordery & Baskerville, 2010, p. 4; Trussel, 2002, p. 29)

Trussel (2002) attests of three limitations that constraint the results. First, the model slightly

modifies the definition of a financially vulnerable NPO to be one that must have had more than a 20

percent decrease (Trussel, 2002, p. 20) in its net assets over three years. However, this percentage

is arbitrarily set as an assumption, hence limiting the research itself. Second, following the same

procedure as in the first model, Table 7 shows the formula to compute the financial vulnerability

probability. Nevertheless, this formula was designed to study NPOs only within the United States.

Third, the study is based on the period from 1996 to 1999, which is a short timeframe.

11

Having regard to the two previous model, the Net Earnings model is an adaptation from the forprofit sectors bankruptcy and financial distress literature as well as from the nonprofit sector

concentration literature (Cordery, Sim, & Baskerville, 2013, p. 187). Although many authors wrote

on this model, we will cover only the most important papers.

First, Gilbert et al. (1990), in their attempt to predict the failure of NPOs, changed the view regarding

financial vulnerability as financial distress. In fact, the model describes that financial distress occurs

when facing negative cumulative earnings, income from continuing operations, over any consecutive

three-year period (Gilbert, Menon, & Schwartz, 1990, p. 163). Their study concluded that the

significant variables in predicting financial vulnerability are low earnings/total assets, low cash flows

from operations/current liabilities, and low stakeholders equity/total liabilities (Cordery, Sim, &

Baskerville, 2013, p. 190).

Second, Hodge & Piccolo (2005) used the resource dependence theory to study NPOs governance.

This theory analyses how an organizations external resources affect its behavior. The authors found

that the diversification of revenue sources (by opposition to the concentration of revenue sources) is

crucial for an organizations viability. Regarding revenue concentration, Carroll and Stater (2009)

confirmed that a diversified portfolio of revenue is more likely to yield organizational stability

(Cordery & Baskerville, 2010, p. 6). They have shown that the most stable NPOs are larger, have

greater growth potential and are located in urban areas (Cordery, Sim, & Baskerville, 2013, p. 190).

Moreover, Keating et al. (2005) noted that organizations should first give the priority to commercial

revenue rather than to donations, and second ensure the sufficiency of these donations and

endowments. They suggested an expanded model, which performs relatively better to predict

financial vulnerability. It includes two more variables in order to represent reliance on commercialtype activities to generate revenues and endowment sufficiency (Tevel, Katz, & Brock, 2014, p. 4).

To summarize, organizations are financially vulnerable if they do not receive sufficient revenue, more

specifically, if its cumulative earnings over four years were negative (Cordery, Sim, & Baskerville,

2013, p. 190). Finally, Table 8 shows the expected signs and significance of the models presented in

this literature review and Table 9 shows the evolution of the definition of financial vulnerability.

Table 8. Summary of estimated signs of the coefficients in a logistic model and

significance when predicting financial vulnerability

Measure

Expected

sign

Greenlee &

Trussel (2000)

Hager

(2001)

Sign

Sign

Sig

Sign

Sig

Trussel &

Greenlee

(2004)

Trussel

(2002)

Sig

Sign

Sig

Sign

EQUITY

CONCEN

ADMIN

Omitted

MARGIN

Keating et

al. (2005)

Sig

= 0.05)

12

PROGRAM EXPENDITURE MODEL

Tuckman & Chang (1991)

immediately when it experiences a financial shock.

Hager (2001)

succeeding years.

three consecutive years.

Trussel et al. (2002)

Trussel (2002)

Trussel & Greenlee (2004)

the one that a decrease in its net assets over three consecutive

years.

the one that had more than a 20 percent decrease in its net

assets over three consecutive years.

the one that had more than a 50 percent decrease in its net

assets over three consecutive years.

Gilbert et al. (1990)

consecutive years.

Source: (Cordery, Sim, & Baskerville, 2013, p. 189)

Methods

Since this study aims at describing the financial strength of the Belgian healthcare nonprofit sector,

our research question is stated as follow: What are the variables affecting the financial vulnerability

of the Belgian health care nonprofit organizations between 2010 and 2013? In consequence, we

performed a binominal logistic regression to determine these variables. We considered this type of

regression as the most appropriate tool for our analysis, first, because it leads to a binary variable

(financially vulnerable or not) and, second, because the independent predictor variables are

continuous.

In order to describe the financial vulnerability of this sector, we need a database to study it. Since

most of the models presented in our literature review were designed for the nonprofit sector within

the United States, these models used data from the IRS Statistics of Income database. In our case,

our study investigates the nonprofit sector of Belgium. Therefore, we rely on the Bel-First15 database

from the Bureau van Dijk (Bel-first, 2015), which is one of the most comprehensive available

database as it contains information about 1.2 million companies in Belgium (Vlerick Library, 2015).

Furthermore, this database also relies on the NACE-Bel nomenclature mentioned in our introduction.

Consequently, we built a sample of health care NPOs. In fact, we restrained the number of companies

from the database by selecting all active organizations with a legal status recognized as

Associations with the codes 86, 87, and 88. More specifically, Appendix 3 presents the exhaustive

listing of all types of activities included in these three health care NACE-Bel codes. In fact, these

Associations cover all types of institutions with legal personality as shown in Table 2. The total

number of nonprofit falling into these three categories amounts to 706 NPOs. However, although the

database is broad, all necessary information were not always available for all the studied years, that

is, 2010-2013. Therefore, 11 nonprofits had then to be removed from the sample since they had too

many missing values and the program could not impute them. As a result, the number of

observations fell to exactly 695 NPOs, as shown in Table 10.

15

13

Total number of Associations in the database

1.754.614

86 Human health activities

87 Residential care activities

88 Social work activities without accommodation

100

400

206

11

695

Source: (Bel-first, 2015)

We adapted the methodology of Trussel et al. (2002) to our study. We used a definition of a financially

vulnerable NPO as the one showing a negative percentage change in net assets. Therefore, each

health care NPO is classified as financially vulnerable or not (Cordery, Sim, & Baskerville, 2013, p.

191). The dependent variable of the binominal logistic regression is financial vulnerability, with two

categories: it is not financially vulnerable (0) and it is financially vulnerable (1) as shown in Table

11. The independent variables are the predictors as defined in Table 6 : MARGIN, EQUITY, CONCEN,

SIZE, SECTOR87 (a binomial variable with values of 1 if the sector if 87, and 0 otherwise), and

SECTOR88 (a binomial variable with values of 1 if the sector is 88, and 0 otherwise).

Table 11. Financial Vulnerability Equations

Financially Vulnerable

4 1

1

4 1

>0

<0

As shown in Table 12, we state four hypothesis. The first hypothesis is expected to occur based on

Trussel & Greenlee (2000). In fact, an NPO with relatively low margins is more likely to be financially

vulnerable compared to an NPO with relatively higher margins. On the one hand, high margins lead

the NPO to able to operate without reducing its program services. On the other hand, if margins are

low, we expect the Belgian health care NPOs to reduce their program offerings. Consequently, the

NPO is likely to be classified as financially vulnerable. Therefore, we expect the independent variable

MARGIN to have a negative influence on the financial vulnerability of NPOs.

The second hypothesis is expected to occur based on Trussel (2002). In fact, an NPO with relatively

more debt is more likely to be financially vulnerable compared to an NPO with relatively less debt.

On the one hand, relatively low amounts of debt lead the NPO to be able to finance its program

services. On the other hand, if the ratio of liabilities over assets is high, we expect the Belgian health

care NPOs to not be able to finance their program services. Consequently, the NPO is likely to be

classified as financially vulnerable. Therefore, we expect the independent variable EQUITY to have a

significant positive influence on the financial vulnerability of NPOs.

The third hypothesis is expected to occur based on Cordery & Baskerville (2010) and Thomas &

Traford (2013). In fact, an NPO with relatively diverse sources of revenues is less likely to be

financially vulnerable compared to an NPO with relatively narrow sources of revenues. On the one

hand, if the portfolio of funding is diverse, it will lead to the stability of the NPO. On the other hand,

if the concentration ratio is high, we expect the Belgian health care NPOs to not be able to easily find

alternative sources of finance if one of its donors cease to fund it. Consequently, the NPO is likely to

be classified as financially vulnerable. Therefore, we expect the independent variable CONCEN to

have a significant positive influence on the financial vulnerability of NPOs.

14

The fourth hypothesis is expected to occur based on Trussel et al. (2002). In fact, a relatively bigger

NPO is less likely to be financially vulnerable compared to a relatively smaller NPO. On the one hand,

if the size of the organization is large, it will lead to the NPO to overcome more easily any financial

distress. On the other hand, if the size is smaller, we expect the Belgian health care NPOs to not

easily overcome any financial distress. Consequently, the NPO is likely to be classified as financially

vulnerable. Therefore, we expect the independent variable SIZE to have a significant negative

influence on the financial vulnerability of NPOs.

The fifth hypothesis is expected to occur. In fact, we decomposed the variable SECTOR by creating

the dummy variables SECTOR87 and SECTOR88, with the sector 86 as reference. In fact, these

dummy variables indicate an expected shift in the dependent variable due to the influence of

categories, i.e. due to the belonging of the NPO to specific subsectors of activities in the health care

nomenclature. Therefore, we expect the independent variable SECTOR to have a significant influence

on the financial vulnerability of NPOs.

Table 12. Financial Vulnerability Hypothesis

H1

H2

H3

The revenue concentration index has a significant positive influence on financial vulnerability.

H4

H5

We performed two preliminary actions on this sample. First, we imputed the missing values in the

data set, which is a practice of 'filling in' missing data with plausible values (PennState Department

of Statistics, 2015). In our case, we performed this practice via the estimation of a regression model

that is predicting values based on other variables. It actually use the variables that we already have

in order to substitute the predicted value to be an actual data. In fact, this is the best technique for

the amount (about 15%) of missing data that we have, and their type (missing not-at-random).

Second, we aggregated the independent variables MARGIN, EQUITY, CONCEN and SIZE for the period

2010-2013 by averaging them, in order to use the resulting variables as predictors (Greenlee &

Trussel, 2000, p. 4; Cordery & Baskerville, 2010, p. 9; Tevel, Katz, & Brock, 2014, p. 8; Hager, 2001,

pp. 380, 384).

Moreover, we checked two assumptions. First, we assumed that there is no significant

multicollinearity16 (i.e. the independent variables are not strongly correlated with one another). To

verify this assumption, we run a linear regression analysis with the same variables as for the

binominal logistic regression. As shown in Table 13, the multicollinearity is not a threat to our model

under the following condition: for all the variables, the variance inflation factor17 must be lower than

3. Indeed, it is effectively the case. In consequence, there is no significant multicollinearity in our

model. Therefore, the first assumption is verified. Second, we assumed that there are no important

outliers in the data series. As shown in Table 14, the note a states there are no outliers in the data

set. Therefore, the second assumption is verified as well.

16

If we have important multicollinearity in our model, the variances of the coefficients increase very much, making those

coefficients unstable and unreliable and reduces the prediction power of the model. The VIFs show us whether the coefficients

variances are inflated due to high multicollinearity. The lower this indicator the better. A value of 1 means that the corresponding

predictor is not at all correlated with the others (that is a rather theoretical situation). A value between 1 and 5 shows a low

correlation. A value between 5 and 10 shows a moderate correlation. A value over 10 indicates a strong correlation.

17

Abbreviated as VIF (VIFs for the plural).

15

Table 15 shows a summary statistics with the relevant information retrieved from the dataset. As

expected, we obtained differences between the 224 financially vulnerable NPOs and the 471 not

financially vulnerable NPOs. First, mean MARGIN is lower for FV NPOs, which implies that financially

vulnerable NPOs have a lower surplus margin (-0.27%) than those that are not financially vulnerable

(1.7%). Second, mean EQUITY is lower for not financially vulnerable NPOs, which implies that

financially vulnerable NPOs have more debt (45.55%) than those that are not financially vulnerable

(41.3%). Third, mean CONCEN is lower for financially vulnerable NPOs, which implies that financially

vulnerable NPOs have lower concentration of revenues (73%) than not financially vulnerable

(74.9%). Fourth, mean SIZE is higher for not financially vulnerable NPOs, which implies that

financially vulnerable NPOs are smaller in average (15.283) than those that are not financially

vulnerable (15.649). Furthermore, Appendixes 4, 5, and 6 show these statistics per sector of activity,

i.e. sectors 86, 87 and 88.

Table 15. Summary Statistics Financially Vulnerable and Not Financially Vulnerable

Status

Number

FV

224

NFV

471

Variable

Mean

Standard Deviation

MARGIN

EQUITY

CONCEN

SIZE

MARGIN

EQUITY

CONCEN

SIZE

-0.027

0.455

0.730

15.283*

0.017

0.413

0.749

15.649*

0.503

0.274

0.158

1.479

0.092

0.257

0.152

1.648

* The difference between FV and NFV mean values is significant at = 0.05, by using t-statistic test.

In addition, Table 16 provides descriptive statistics, namely t-statistic and Pearson correlations. First,

the one-sample or univariate t test compares the mean of a sample with a given value, often zero

(IDRE, 2015). Second, only two Pearson correlation coefficients are statistically significant from this

matrix. On the one hand, the correlation between MARGIN and SIZE is -0.175 and it is statistically

significant. On the other hand, the correlation between CONCEN and SIZE is -0.109 and it is

statistically significant as well.

Table 16. Descriptive Statistics for the Independent Variables

Univariate test

t-statistic

Pearson correlations

EQUITY

CONCEN

SIZE

MARGIN

EQUITY

CONCEN

SIZE

-.832

24.864*

69.123*

154.799*

-.011

-.041

-.175*

.096

-.080

-.109*

16

Results

Before interpreting the binominal logistic regression, a two-fold analysis of the independent variables

is necessary. First, SPSS generates the omnibus tests of model coefficients, analyzing whether the

independent variables are good predictors, overall, for the outcome variable of financial vulnerability.

In our case, as shown in Table 17, the chi-square test value with 6 degrees of freedom is 19.242,

p=0.004. As we added all explanatory variables in one block, there is only one-step and all three

values are the same. Since the significance value (or p value) is lower than 0.05, our independent

variables satisfactorily explain the dependent variable. Second, SPSS generates the HosmerLemeshow test, analyzing how bad the independent variables predict the dependent variable. For

our model to be valid, this test should not be significant. In our case, as shown in Table 18, the

dependent variables adequately predict the outcome variable since p=0.067 > 0.05.

Subsequently, SPSS generates the pseudo-R values with both the Cox-Snell and Nagelkerke

indicators, telling us what percentage of the variation in the dependent variable is explained by the

independent variables. On the one hand, the Cox-Snell statistics can take any value between 0

inclusive and 1 exclusive. On the other hand, the Nagelkerke indicator is a corrected Cox-Snell

indicator, normalized so that it can take the value 1. For this reason, this last indicator is often the

only one to be reported and interpreted. In our case, as shown in Table 19, the independent variables

explain about 3.8% of the variation in the outcome variable, as assessed by the Nagelkerke statistics.

Table 17. Omnibus Tests of Model Coefficients

With regard to these preliminary analyses, the binomial logistic regression generates the coefficients

table as shown in Table 20. It presents the output resulting from including all of the candidate

predictor variables in the equation (Stat Tutorials, 2015) to show the individual impact of each

predictor on the financial vulnerability of NPOs. Actually, we will report three elements for each

variable. First, we describe the regression coefficient B18 used to determine which of the independent

variables have the biggest effect on the dependent variable. Second, we describe the results of the

Wald test19 used to know whether the coefficient is statistically significant20, i.e. whether the

corresponding variable has a good predicting power. Third, we describe the antilogarithm21 of the

coefficient Exp(B) used to know the chance that an NPO is financially vulnerable, depending on the

corresponding predictor. Our results are presented in two parts. We will present first the coefficients

for the continuous predictors (MARGIN, EQUITY, CONCEN, and SIZE), and second the coefficients for

the categorical predictors (SECTOR87 and SECTOR88).

18

The regression coefficient B represents the relationship between a given explanatory variable and the outcome variable. It is

precisely how much the outcome variable changes after a change of one unit in the explanatory variable (ReStore, 2015).

19

The Wald test is a way of testing the significance of particular explanatory variables in a statistical model (Crichton, 2001).

20

For the statistically significant coefficients, we are going to report the 95% confidence interval.

21

If x is the logarithm of y, then y is the antilogarithm of x.

17

Regarding the continuous predictors, the four ratios show the following results. First, the regression

coefficient for MARGIN is -0.971, and it is not statistically significant as assessed by the Wald test

(p=0.250 > 0.05). The antilogarithm of the regression coefficient is 0.379. In consequence, the

hypothesis H1 is not verified. Second, the regression coefficient for EQUITY is 0.558, and it is nearly

significant as assessed by the Wald test (p=0.077 < 0.10). The antilogarithm of the regression

coefficient is 1.748. In consequence, the hypothesis H2 is partially verified. Third, the regression

coefficient for CONCEN is -1.283, and it is statistically significant as assessed by the Wald test

(p=0.024 < 0.05). The antilogarithm of the regression coefficient is 0.277. In consequence, the

hypothesis H3 is verified. Fourth, the regression coefficient for SIZE is -0.160, and it is statistically

significant as assessed by the Wald test (p=0.007 < 0.05). The antilogarithm of the regression

coefficient is 0.852. In consequence, the hypothesis H4 is verified.

Therefore, the variables with the strongest influence on financial vulnerability are SIZE, CONCEN,

and EQUITY. MARGIN does not seem to have a significant influence. Based on the antilogarithms, we

can determine the chance (odds) of getting financially vulnerable and compute the probability to be

, where o are the odds. The reference

1+

values for the continuous predictors are considered the lower values: NPOs with higher values are

compared with those with lower values in terms of odds to become financially vulnerable. Table 21

presents, for each continuous predictor, the odds of becoming financially vulnerable as well as the

probabilities to be and to not be financially vulnerable, for the cases with high values of the predictors.

For the cases with the low values, the probabilities will be reversed.

Table 21. Odds of financial vulnerability for continuous predictors

Variable

financially vulnerable

Probability of being

financially vulnerable

financially vulnerable

MARGIN

EQUITY

CONCEN

SIZE

0.379

1.748

0.277

0.852

0.275

0.636

0.217

0.460

0.725

0.364

0.783

0.540

Four consequences are retrieved from this analysis. First, the odds that an NPO with big surplus

margin is financially vulnerable are about 62% (1-0.379) lower than the same odds for an NPO with

small surplus margin or 2.6 times lower (1/0.379). Thus, the probability that an NPO with big

surplus margin is financially vulnerable is 27.5%, and the probability that an NPO with big surplus

margin is not financially vulnerable is 72.5%. For an NPO with small surplus margin, these

probabilities are reversed.

18

Second, the odds that an NPO with high equity is financially vulnerable are about 75% (1-1.748)

higher than the same odds for an NPO with low equity or 1.7 times higher. Thus, the probability

that an NPO with high equity is financially vulnerable is 63.6%, and the probability that an NPO with

high equity is not financially vulnerable is 36.4%. For an NPO with low equity, these probabilities are

reversed.

Third, the odds that an NPO with high revenue concentration index is financially vulnerable are about

72% (1-0.277) lower than the same odds for an NPO with low revenue concentration index or 3.6

times lower (1/0.277). Thus, the probability that an NPO with high revenue concentration index is

financially vulnerable is 21.7%, and the probability that an NPO with high revenue concentration

index is not financially vulnerable is 78.3%. For an NPO with low revenue concentration index, these

probabilities are reversed.

Fourth, the odds that an NPO with big size is financially vulnerable are about 15% (1-0.852) lower

than the odds for an NPO with small size or 1.2 times lower (1/0.852). Therefore, the chance of

financial vulnerability decreases by 15% when the NPO size increases. Thus, the probability that an

NPO with big size is financially vulnerable is 46%, and the probability that an NPO with big size is

not financially vulnerable is 54%. For an NPO with small size, these probabilities are reversed.

Regarding the categorical predictors, the coefficients are only provided for the category 1 for both

variables SECTOR87 and SECTOR88. As a reminder, these variables take the value 1 if the NPO

belongs respectively the sector 87 or the sector 88, and 0 otherwise. Therefore, for the reference

category 0, the coefficients are easy to compute, given that the sum of the coefficients for each

categorical variable is equal to zero.

Subsequently, the two dummy variables SECTOR87 and SECTOR88 show the following results. First,

the regression coefficient for SECTOR87 (category 1) is -0.195, and it is not statistically significant

as assessed by the Wald test (p=0.448 > 0.05). The antilogarithm of the regression coefficient is

0.822. In consequence, the hypothesis H5 is not verified. Second, the regression coefficient for

SECTOR88 (category 1) is -0.357, and it is not statistically significant as assessed by the Wald test

(p=0.231 > 0.05). The antilogarithm of the regression coefficient is 0.700. In consequence, the

hypothesis H5 is not verified as again.

Therefore, the dummy variables SECTOR87 and SECTOR88 do not seem to have a substantial

influence on financial vulnerability. Table 22 presents, for each categorical predictor, the odds of

being financially vulnerable as well as the probabilities to be and not to be financially vulnerable, for

the category 1. For the reference category 0, these probabilities will be reversed.

Table 22. Odds of financial vulnerability for categorical predictors

Variable

vulnerable Exp(B)

Probability of being

financially vulnerable

financially vulnerable

SECTOR 87

SECTOR 88

0.822

0.700

0.451

0.412

0.549

0.588

Two consequences are retrieved from this analysis. First, the odds that an NPO belonging to sector

87 is financially vulnerable are about 18% lower than the same odds for an NPO belonging to sector

86 (reference) (1-0.822) or 1.2 times lower (1/0.822). Thus, the probability that an NPO belonging

to sector 87 is financially vulnerable is 45.1%, and the probability that an NPO with big surplus

margin is not financially vulnerable is 54.9%. Second, the odds that an NPO belonging to sector 88

is financially vulnerable are about 30% lower than the same odds for an NPO belonging to sector 86

(reference) (1-0.700) or 1.4 times lower (1/0.700). Thus, the probability that an NPO belonging to

sector 88 is financially vulnerable is 41.2%, and the probability that an NPO belonging to sector 88

is not financially vulnerable is 58.8%.

19

Out of the NPOS that are not financially vulnerable, 98.1% were correctly classified, while out of

those that are financially vulnerable, 4% were correctly classified. Overall, 67.8% of the NPOs were

correctly classified (471 out of 695) as shown in Table 23.

Table 23. Classification table

Discussions

With regard to these results, we will discuss five elements. We will firstly discuss whether our results

demonstrate our hypotheses. We will secondly explain how our results give an answer to our research

question. We will thirdly develop some arguments to convince the reader that our study has changed

the fields knowledge. We will fourthly deal with the international component of our study. We will

finally raise some recommendations for further studies.

First, our study show diverse results regarding the hypothesis. The first hypothesis stating a

significant influence of surplus margin on financial vulnerability is not verified. This finding contradicts

both Trussel and Greenlee (2001) and Trussel (2002) concluding that MARGIN significantly influence

financial vulnerability. The second hypothesis stating a significant influence of equity on financial

vulnerability is partly verified. Although a predictor that has a low p-value is likely to be a meaningful

addition to [the] model because changes in the predictor's value are related to changes in the

response variable (Frost, 2013) and despite very low p-value generated by the Wald test, the

regression coefficient mitigates the verification of this hypothesis. This finding is relatively in line

both with Trussel (2001) concluding that EQUITY significantly influence financial vulnerability, and

Trussel (2002) concluding that EQUITY does not significantly influence financial vulnerability.

The third hypothesis stating a significant influence of revenue concentration index on financial

vulnerability is verified. This finding contradicts Trussel and Greenlee (2001) concluding that CONCEN

does not significantly influence financial vulnerability, and is in line with Trussel (2002) concluding

that CONCEN significantly influence financial vulnerability. The fourth hypothesis stating a significant

influence of organization size on financial vulnerability is verified. This finding is in line with Trussel

and Greenlee (2001) concluding that SIZE significantly influence financial vulnerability, and

contradicts Trussel (2002) concluding that SIZE does not significantly influence financial

vulnerability. The fifth hypothesis stating a significant influence of sector on financial vulnerability is

not verified. This contradicts Trussel and Greenlee (2001) concluding that SECTOR significantly

influence financial vulnerability.

Second, our research question examined What are the variables affecting the financial vulnerability

of the Belgian health care nonprofit organizations between 2010 and 2013? The predictors generally

have a substantial influence on financial vulnerability, as assessed by the omnibus tests and the

Hosmer-Lemeshow test. The predictors with the most important contributions are size, revenue

concentration index and equity, in this order. For these variables, the regression coefficients are

statistically significant (or borderline significant). The predictor surplus margin has a meaningful

effect on the outcome variable, though the regression coefficient is not statistically significant. As for

the variable sector, it does not seem to have an important effect on financial vulnerability.

20

Third, the contribution of our study entail a two-fold change in the fields knowledge. On the one

hand, this study has changed the fields knowledge as it intended to be the very first empirical

groundwork for the literature on the Belgian nonprofit sector. In fact, most experts generally

discussed the financial vulnerability of the nonprofit sector in Belgium whereas no statistical research

has ever been conducted yet. On the other hand, this study has changed the fields knowledge also

because we adapted Trussel (2002) in an entirely other environment than the United States, for

which it has been designed. Indeed, it is particularly relevant since most US-developed models have

been found to exhibit different levels of explanatory power in different segments (Cordery, Sim, &

Baskerville, 2013, p. 190) of the nonprofit sector.

Fourth, and consequently to our third discussion, we can reveal the potential international component

of our study by its geographical context. Although our study focused on a particular segment of the

Belgian nonprofit sector, it may be relevant to compare our results in a broader geographical context,

weather it is to European results, to O.E.C.D. results, or merely to international results. In fact, such

comparisons allow us to evaluate the strength of the nonprofit sectors across countries. Furthermore,

our study can be generalized and applied to other context than the Belgian one since any national

nonprofit sector can be the focus the analysis model that we applied.

Finally, two recommendations can be raised for further studies. On the one hand, a first limitation of

our study has regard with the relatively small database. Although the database contained a wide

number of associations, our study did not cover all of them first because of the limited availability of

data, and second because there were missing values. In fact, we have used the data imputation as

a technique to overcome the missing data but this can also be considered as a weakness of our

study. However, a pairwise deletion technique could not be conceivable because the amount and the

type of missing data, as explained in our methodology, since the number of valid cases in our sample

would decrease substantially. Therefore, further studies should collect comprehensive data over a

wider timeframe than only four years. On the other hand, a second limitation of our study has regard

with the research focus, restrained to only on one segment of the nonprofit sector, i.e. the health

care segment. Therefore, further researches should expand it to include all the nonprofit subsectors.

Conclusion

Throughout the development of this Masters thesis, the core idea behind our investigation was to

lay the empirical foundation of the literature on the Belgian nonprofit sector. In fact, this lack of

empirical research has been a constant motive for pursuing our study. As explained in the

introduction, the health care subsector accounts for more than half of the public funding allocated to

the nonprofit sector and represents about a third of the value added of the overall nonprofit sector

(Vander Donckt & Rigo, 2013, pp. 21-22). Despite the predominance of this sector, a thorough

research regarding the financial vulnerability of health care organizations was necessary to

understand the impact of certain parameters on their ability to overcome any financial distress.

Financial distress can occur at any time for any organization, whether for-profit or nonprofit. Margins

can fall, donators can withdraw their contributions, debt can increase, and the size of the organization

can be impacted as well. Therefore, an organizations management should be concerned by its

vulnerability. This study, overall, concludes that among the five parameters defined by Trussel et al.

(2002), only three of them organizational size, revenue concentration, and debt ratio are

significant parameters that affected the financial vulnerability of Belgian health care nonprofit

organizations between 2010 and 2013. This may raise some questions for further researches. Since

these three variables are significant, how did these parameters vary over the 2008-2009 financial

crisis period? To what extend the crisis has impacted those organizations in their financial

vulnerability? How did they overcome this shock? Could their situation before the crisis be able to

tackle such distress? New doors are open for further investigations.

21

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24

Appendixes

Appendix 1. Employment in IWPP (2004-2010)

2004

2005

2006

2007

2008

2009

2010

Number of IWPP

16,913

17,015

17,400

17,624

17,794

18,630

18,731

Wage employment

(absolute value)

368,300

382,900

401,500

416.500

431,700

430,600

446,500

Wage employment

(as % of the

10.5%

10.8%

11.1%

11.3%

11.5%

11.5%

11.9%

countrys wage

employment)

Source : (Mare, Gijselinckx, Loose, Rijpens, & Franchois, 2008, p. 13; Mare, 2010a; Banque

Nationale de Belgique, 2010, p. 7; Banque Nationale de Belgique, 2012, p. 8; Vander Donckt &

Rigo, 2013, p. 17)

Wage employment in 2010 (in

thousands, units)

Agriculture and industry

10.3

Services

61.7

Education

8.9

Human health

146.7

Social action

163.6

Arts, spectacles, and other recreational activities

16.0

Other service activities

39.5

Total of IWPP

446.5

Rest of the economy

3,310.8

Source : (Vander Donckt & Rigo, 2013, p. 30)

25

Q86

Q86.1

Hospital activities

Q86.1.0

Hospital activities

Q86.2

Q86.2.1

Q86.2.2

Q86.2.3

Q86.9

Q86.9.0

Q87

Q87.1

Q87.1.0

Q87.2

Residential care activities for mental retardation, mental health and substance abuse

Q87.2.0

Residential care activities for mental retardation, mental health and substance abuse

Q87.3

Q87.3.0

Q87.9

Q87.9.0

Q88

Q88.1

Social work activities without accommodation for the elderly and disabled

Q88.1.0

Social work activities without accommodation for the elderly and disabled

Q88.9

Q88.9.1 -

Q88.9.9 -

Source : (Europa, 2015)

26

Sector 86

Status

Number

Variable

Mean

Standard Deviation

FV

31

MARGIN

0.021

0.089

EQUITY

0.492

0.242

CONCEN

0.752

0.171

a

SIZE

15.713

1.955

NFV

67

MARGIN

0.017

0.057

EQUITY

0.450

0.215

CONCEN

0.803

0.131

SIZE

17.631a

1.699

* The difference between FV and NFV mean values is significant at = 0.05, by using t-statistic test.

Sector 87

Status

Number

Variable

Mean

Standard Deviation

FV

127

MARGIN

-0.039

0.087

EQUITY

0.451

0.240

CONCEN

0.754

0.840

SIZE

15.423

1.196

NFV

267

MARGIN

0.019

0.087

EQUITY

0.426

0.280

CONCEN

0.762

0.127

SIZE

15.542

1.143

* The difference between FV and NFV mean values is significant at = 0.05, by using t-statistic test.

Sector 88

Status

Number

Variable

Mean

Standard Deviation

FV

66

MARGIN

-0.030

0.085

EQUITY

0.446

0.342

CONCEN

0.672

0.172

SIZE

14.811

1.813

NFV

137

MARGIN

0.013

0.114

EQUITY

0.371

0.222

CONCEN

0.698

0.188

SIZE

15.019

1.887

* The difference between FV and NFV mean values is significant at = 0.05, by using t-statistic test.

27

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