For a few years now people have been calling for foundations and other funders to provide more long term capital investment in non-profit organizations. The Social Velocity blog has an interview with Rebecca Thomas, Vice President of Strategy and Innovation at the Nonprofit Finance Fund. (NFF) (h/t National Endowment for the Arts) The NonProfit Finance Fund is in the fourth year of a decade long effort to provide $1 million of what they term change capital in each of 10 performing arts organizations they selected.
One thing Thomas talks about is how many non-profits are mis-captialized in that they have sufficient capital, but that most of it is in the form of restricted funds. She touches upon this in a separate publication, Case for Change Capital in the Arts and Financial Reporting Done Right, which I have briefly looked at and hope to blog on in the near future.
The thing that caught my eye was her discussion of how capital and revenue are reported on non-profit financial reports.
One of the things we learned early on in this work is that changing the financial reporting—to separate capital flows from recurring revenue—would not be an easy sell, for understandable reasons. Executive directors are reluctant to take a chance presenting new formats to donors who don’t understand the technique, and many board members aren’t inclined to re-learn nonprofit accounting principles. Moreover, NFF’s suggested methodology is not required by the Financial Accounting Standards Board, and auditors don’t always feel comfortable suggesting novel formats, even when they provide heightened clarity.
[…] suffice it to say that when capital and revenue are conflated, an organization’s reports do not present a realistic view of operating performance. Unintentionally misleading information can lead to poor planning and decision making by nonprofit leaders, boards and funders.
Longer term, it will take aggressive education and advocacy efforts to convince nonprofit executives, board members and funders of the value of producing transparent financial reports and audits that reveal business model economics separate from capital infusions. Nonprofits will need to be convinced that they won’t be penalized for producing statements that may, at times, show temporary weakness in operating results during a change or growth period.
Since NFF is in it for the long haul to help the 10 organizations in their pilot program institute substantial change, my guess is that they are trying to develop a way to effectively educate and communicate the validity of this different approach in financial reporting to boards and funders.
The first thing that came to mind when Thomas talks about mis-capitalization is how the Philadelphia Orchestra declared bankruptcy while possessing a substantial, but apparently restricted endowment. I couldn’t help but wonder if implementing the type of reporting discussed here would have made the real financial situation clearer earlier on.
I also wonder if they may not be the perfect candidate for using this reporting going forward. Even with the bankruptcy, they probably have the wherewithal to alter their accounting method where most arts organizations wouldn’t. Given their prominence, they could serve as an exemplar to non-profits, their boards and funders as to why these reporting methods should be adopted and properly understood.
One thing to note if you are hoping NFF’s pilot program becomes a trend, according to Thomas not all organizations are good candidates for change capital. They have to already possess strong management and self-evaluative processes which include data informed decision making.