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Rethinking Liquidity in Nonprofit Organizations: The Dual Role of Excess Cash in Explaining Financial Vulnerability

Teresa Elvira‐Lorilla et al.

Financial Accountability and Management2026https://doi.org/10.1111/faam.70035article
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Abstract

This study examines the dual impact of excess cash holdings on the financial vulnerability of nonprofit organizations (NPOs) through an integrative framework that combines insights from the behavioral theory of the firm and agency theory. From a behavioral perspective, excess liquid assets represent unabsorbed organizational slack that can enhance financial resilience by buffering organizations against funding shocks. From an agency perspective, however, unusually high cash balances may be absorbed into administrative structures, increasing internal costs and weakening financial discipline. Using a large panel dataset of 9177 NPOs in England and Wales (42,350 observations from 2015 to 2022) and generalized structure equation modeling, we find that excess cash is directly associated with a lower likelihood of future financial vulnerability, consistent with its precautionary role as a financial buffer. At the same time, excess cash is associated with higher overhead costs, which in turn slightly increase financial vulnerability. This indirect channel partially offsets, but does not eliminate, the protective effect of excess liquidity. Overall, the findings show that excess cash can strengthen nonprofit financial resilience while simultaneously generating internal cost dynamics that attenuate its benefits. By distinguishing between unabsorbed and absorbed slack, the study clarifies how liquidity accumulation can have both stabilizing and potentially adverse consequences for nonprofit financial health.

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https://doi.org/https://doi.org/10.1111/faam.70035

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@article{teresa2026,
  title        = {{Rethinking Liquidity in Nonprofit Organizations: The Dual Role of Excess Cash in Explaining Financial Vulnerability}},
  author       = {Teresa Elvira‐Lorilla et al.},
  journal      = {Financial Accountability and Management},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.1111/faam.70035},
}

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