CNE Financial Sustainability & Diversification 2 — Questions and Answers
Question 1: A nonprofit relies on a single government grant for 70% of its revenue. Which risk does this concentration most directly create?
- Reputational risk from public perception
- Revenue cliff risk if the grant is not renewed (Correct answer)
- Compliance risk from increased IRS scrutiny
- Operational risk from volunteer turnover
Correct answer: Revenue cliff risk if the grant is not renewed
Heavy reliance on one funding source creates a revenue cliff—if that source disappears, the organization faces an immediate financial crisis.
Question 2: What is a 'bridge loan' in the context of nonprofit cash flow management?
- A permanent endowment fund for capital projects
- Short-term borrowing used to cover a gap until expected revenue arrives (Correct answer)
- A matching gift arrangement with a corporate sponsor
- A line of credit used exclusively for payroll
Correct answer: Short-term borrowing used to cover a gap until expected revenue arrives
A bridge loan is short-term financing that covers operational expenses while an organization waits for confirmed revenue such as a grant payment.
Question 3: Which revenue source is generally considered most 'unrestricted' and therefore most flexible for nonprofit operations?
- Federal formula grants
- Program-specific foundation grants
- Individual major gifts with no donor-imposed conditions (Correct answer)
- Corporate sponsorships tied to specific events
Correct answer: Individual major gifts with no donor-imposed conditions
Individual major gifts given without conditions are unrestricted and can be used for any organizational purpose, offering maximum financial flexibility.
Question 4: A nonprofit's operating reserve policy states it should maintain three months of operating expenses. If monthly expenses are $80,000, what is the target reserve balance?
- $80,000
- $160,000
- $240,000 (Correct answer)
- $320,000
Correct answer: $240,000
Three months of $80,000/month equals $240,000 in operating reserves.
Question 5: Which of the following best describes 'program-related investments' (PRIs) that foundations may make to nonprofits?
- Unrestricted grants given for general operating support
- Loans or equity investments that advance the foundation's charitable mission (Correct answer)
- In-kind donations of equipment for nonprofit programs
- Matching gift campaigns tied to staff fundraising
Correct answer: Loans or equity investments that advance the foundation's charitable mission
PRIs are loans, loan guarantees, or equity investments made by foundations that further their charitable mission and can count toward their payout requirement.
Question 6: A nonprofit charges below-market rent to a sister organization sharing its building. Under GAAP, how should the difference between fair market rent and the charged amount be recorded by the nonprofit receiving the benefit?
- No entry is needed since no cash changed hands
- As contributed services revenue and expense
- As in-kind contribution revenue and facility expense (Correct answer)
- As a deferred revenue liability
Correct answer: As in-kind contribution revenue and facility expense
Under GAAP, below-market rent received should be recorded as in-kind contribution revenue at fair value, with an offsetting facility expense.
Question 7: Which metric best measures whether a nonprofit is generating enough surplus to sustain long-term financial health?
- Current ratio
- Operating surplus/deficit as a percentage of total expenses (Correct answer)
- Days cash on hand
- Accounts receivable turnover
Correct answer: Operating surplus/deficit as a percentage of total expenses
The operating surplus or deficit as a percentage of total expenses reveals whether an organization consistently covers its costs and builds reserves over time.
CNE Financial Sustainability & Diversification 2
A nonprofit relies on a single government grant for 70% of its revenue.
Which risk does this concentration most directly create?