Nonprofits face increasing scrutiny around their financial health, especially in periods of economic uncertainty. One area that leaders cannot afford to overlook is the principle of going concern—the assertion that an organization will remain in operation, meet obligations as they come due, and continue delivering programs and services. For nonprofit leaders, understanding this concept is not simply an accounting technicality; it is a cornerstone of sustainability, risk management, and donor trust.
This article outlines the definition of going concern, common misconceptions, warning signs, and how management should approach the issue proactively and during an annual audit.
Why Going Concern Matters
At its core, going concern means that an organization has the financial resources and organizational capacity to continue operating into the foreseeable future. It is not about short-term cash balances but rather about long-term viability, stability, and compliance with obligations.
When organizations neglect this principle, they risk more than financial distress—they risk eroding donor confidence, program disruption, and even regulatory scrutiny.
Going Concern Misconceptions
A recent AICPA presentation on Going Concern identified several myths that persist in the nonprofit sector that can prevent leaders from addressing going concern effectively:
- “This doesn’t apply to nonprofits.” In reality, going concern is just as critical for nonprofits as it is for a for profit business.
- “Nonprofits should not generate a surplus.” While nonprofits are mission-driven, generating surpluses is essential for reserves, investment, and sustainability.
- “Past performance predicts future performance.” Financial health must be evaluated continuously; yesterday’s stability does not guarantee tomorrow’s viability.
- “Healthy organizations don’t need to be concerned about this.” Even financially strong nonprofits should conduct ongoing analysis to anticipate risks.
Indicators That May Raise Doubt
Management should be alert to signals of financial stress that could cast doubt on going concern status. These indicators are not always isolated events but can often appear in combination, compounding the risks to organizational stability. Key warning signs include:
- Recurring operating losses – Consistent deficits signal that the organization’s cost structure may be unsustainable. Leaders should assess whether expenses are aligned with mission priorities and whether new revenue strategies are needed.
- Working capital deficiencies – Limited short-term liquidity may hinder the ability to cover payroll, vendor obligations, or program expenses. Tracking days cash on hand and current ratio metrics can help identify emerging issues early.
- Loan defaults or debt restructuring – Defaults, frequent refinancing, or inability to meet scheduled payments suggest over-leverage and can erode relationships with creditors.
- Missed financial covenants – Violating bank or bond covenants often triggers lender scrutiny and can limit access to future financing.
- Overreliance on restricted funds or a single donor/vendor – Heavy concentration of revenue sources creates vulnerability. The loss or restriction of one source can quickly destabilize operations.
- Noncompliance with donor restrictions – Using restricted funds improperly not only creates audit risk but can damage credibility with funders.
- Delayed payments to vendors or vendors demanding cash upfront – Persistent payment delays indicate cash flow stress, while vendors insisting on advance payment may reflect reputational damage in the marketplace.
- Leadership or governance instability – High turnover in executive roles or disengaged boards can exacerbate financial risk and weaken the organization’s ability to respond proactively.
These red flags should not be viewed in isolation. Instead, management should conduct a holistic review to determine whether multiple factors are converging to heighten the risk of going concern challenges. Recognizing these early provides an opportunity for corrective action before issues escalate.
How Management Should Address Going Concern on a Regular Basis
Proactive leadership requires ongoing monitoring and structured planning. Nonprofit executives should:
- Establish diversity of funding sources, so the organization is less susceptible to the loss of one source or one type of funding.
- Conduct cash burn and runway analyses to understand how long-term operations can be sustained.
- Establish an effective budgeting and forecast process including scenario and contingency plans for spending freezes, program cuts, or layoffs.
- Strengthen internal controls and risk monitoring to catch deteriorating trends early.
- Assess fraud risks that may increase under financial stress.
Building these practices into regular financial management will reduce surprises and strengthen organizational resilience.
What Nonprofit Managers Should be Doing Now and What will be Required if an Auditor Finds Doubt is Raised
Now: Nonprofit managers should integrate going concern evaluations into their ongoing risk management and financial oversight practices. This includes building reserves, diversifying revenue streams, and conducting regular scenario planning.
If Doubt is Raised: The Organization will need to provide management’s plans, with transparent evaluations, to address the concern. A cash flow analysis that extends through a year from the anticipated date of the auditor’s report may be required. Management will need to be able to provide documentation that supports their plans, such as new funding agreements or evidence of reductions of expenditures. Taking a proactive stance not only supports the audit process but also reassures donors, regulators, and stakeholders that the organization is addressing challenges responsibly.
Bottom Line: Going concern is not simply an accounting term; it is a leadership responsibility. By addressing it head-on, nonprofits protect their missions, strengthen donor trust, and position themselves for long-term impact.
Ready to Take Action? Han Group is here to help your organization establish strong financial oversight practices, prepare for potential risks, and navigate going concern evaluations with confidence. Contact us to start building a more resilient future for your nonprofit.
