When donors see nonprofit financial statements with large surpluses, they often respond to requests for support by saying something like: “you have plenty of funding; I should invest in a nonprofit that really needs my support.” That thinking is counterproductive and, in some cases, inaccurate. Successful programs and demand for services do not always equate with sufficient funding—to the contrary, “success” often calls for increased funding.
Nonprofits generally budget to a modest surplus to account for capital improvements and other balance-sheet related items. Occasionally, nonprofits may significantly exceed those budgeted surpluses due to a number of factors like strong fundraising and operations. That sounds great, doesn’t it? Not in all cases.
Strong operating results demonstrate, in part, that a nonprofit is well-run – achieving its mission within its means. According to global organization The Bridgespan Group, an industry leader in connecting the social and business sectors; “in the nonprofit world, increased demand for services often means an increase in costs (to provide those services) with no associated change in revenue.” Such a scenario leaves an organization scrambling for funding to keep up with demand.
Let’s assume that’s the case with your favorite charity. Multiple years of solid results lay a foundation for growth, quality improvement in programs, and a sturdier balance sheet to withstand economic downturns. In theory, donors should see prosperous results and say: “I should invest more in that entity.” Financially robust nonprofits are well-managed and leverage that success for greater impact in their communities. Donors who instead fund nonprofits who “need more help” rarely achieve their desired return on investment.
The thinking may also be mistaken due mainly to accounting rules that result in audited financial statements that look better than they appear. Two items, in particular, mask the true results of operations. When an organization undertakes a multi-year Capital Campaign all pledges must be recorded as income in the year the pledge is made. That means a $50,000 pledge over 5 years must be recognized in its entirety in the first year, rather than just the $10,000 actually received. Also, nonprofits must recognize all unrealized gains from their investment portfolio. In a good investing year, this may result in hundreds of thousands of dollars in income that is not actual cash for operations.
In effect, all surpluses are not equal.
ABOUT THE AUTHOR
John Wellons is President of Boys & Girls Clubs of Delaware. Prior to starting with the Boys & Girls Clubs of Delaware in 2012, he held leadership positions with the Buccini/Pollin Group, Bank of America, MBNA America, KPMG Australia, and KPMG Consulting U.S. To learn more about Boys & Girls Clubs of Delaware, visit bgclubs.org. John can be reached at JWellons@bgclubs.org or 302-658-1870.