JM226 said: "Exactly. Not for profit is a tax status, not a business strategy. You still are held accountable by a balance sheet just like a for profit entity. you don't seem to understand that unlike commercial theatre, not-for-profit theatre CAN sustain a loss because they have benefactors who will underwrite many of the expenses normally included in a standard production budget. they also have millions of dollars in assets and a well-sustained "rainy day fund" or "production reserve," which allows them to absorb those losses without being hurt directly. the economics of non-profit theatre and commercial theatre is simply NOT comparable. "
I've been a consultant to nonprofits for 20+ years and am a former nonprofit CEO. Trust me, I understand the way they operate financially. And nowhere did I say they couldn't sustain a loss. But any nonprofit exec will tell you that some of their programs or services must generate excess revenues in order to sustain the very losses they are willing to incur in other areas ... or make those funding shortfalls up through donations, grants, or other revenue sources.
Reserves are also generally intended for extraordinary circumstances, not routine losses or budget shortfalls. Yes, a nonprofit that has reserves beyond whatever percentage of annual budget they've identified as their goal will sometimes choose to invest them in riskier programs or to underwrite planned losses, but tapping into reserves regularly is simply not sustainable and board members often oppose doing so as a breach of their fiduciary duty of care for the long-term well being of the organization.
Bottom line: nonprofits should strive to produce a financial surplus (however small) that they reinvest in their mission and stakeholders as opposed to paying dividends to stakeholders as a for profit entity would do.
Updated On: 2/1/16 at 08:43 PM