Can we determine debt to equity levels in non-profit organisations? Answer based on Polish case

Abstract

The goal of the article is to find the answer whether it is possible to propose a model for fixing the best debt levels in the capital structure of non-profit organisations. Capital structure is an indicator that corroborates the level of financial risk. Non-profit organisations are an essential part of the general social policy. When considering the efficiency of non-profit entities from a donor perspective, it is important to take into account the way management uses the resources of a non-profit organisation as well as efficiency of that management activity. Non-profit organisation efficiency should be considered in the context of risk. One of the most important ways to increase probability to face financial distress is too high debt to equity relation. The paper illustrates the relationship between debt and equity in 1,560 Polish non-profit entities. The model which can fix optimal capital structure for a non-profit organisation in its current environment was delivered. The proposal of the paper includes a model which helps to find the optimal level of debt for non-profit organisation environmental conditions. The novelty of the model is based on the full costs of debt financing non-profit entities in the context of donor expectations, which in the Polish social and economic environment means that costs indirectly linked with the realisation of the main aim of the social entity cannot be higher than 10 % of the collected money sources. An additional point of our findings is that in comparison with the current state, Polish non-profit organisations need to improve their way of fixing capital structure.