Академический Документы
Профессиональный Документы
Культура Документы
A
s a part of the job description, all non- tion’s assets, liabilities and net assets. Every Capital structure
profit executives manage the tension nonprofit—no matter how small or young—has
between the pursuit of mission and the a capital structure. There are many kinds of can be simple, with
preservation of organizational and capital structure, and there is no such thing as
financial viability. This tension exerts one “correct” kind. It can be simple, with small small amounts of
pressure on day-to-day operations, and while it amounts of cash supplemented by “sweat equity”
sometimes seems that one role dominates the and enthusiasm, or highly complex, with multi- cash supplemented
other, in a healthy organization they must always ple reserves, investments and assets.
be balanced. Let’s look at an example: a school. Typical by “sweat equity”
Actually, three key factors interact to sustain schools have classrooms with desks and chairs,
health over time. The first two points of this teachers and administrative staff who are paid and enthusiasm, or
triad are mission and organizational capacity, on a regular basis, computers and other equip-
which are familiar to all. The third is equally ment, and varying amounts and kinds of receiv- highly complex,
important but less well understood: capital ables (a school’s receivables might include
structure. I will refer back to this triad later in multi-year pledges in a capital campaign, tuition with multiple
the article. owed, government funds to reimburse per-pupil
Capital structure is sometimes invisible but expenditures, and certain kinds of grants). reserves,
never absent. There are four principles to Sometimes the school has been financed by a
remember: long-term loan (a mor tgage or tax-exempt investments
• First, and fundamentally, capital structure bonds). Sometimes it draws on a line of credit at
exists in even the smallest nonprofits; ignoring a bank or a cash reserve to fund payroll before and assets.
it puts an organization at risk. tuition has been received. Some schools have
• Second, capital structure always has an endowments that are invested and produce
impact on mission and program, and on organi- income to help subsidize operations. Some own
zational capacity. vehicles, art or substantial tracts of land.
• Third, capital structure is linked directly to The combination of these elements translates
a nonprofit’s underlying business, which is dis- into the school’s capital structure. And decisions
tinct from, though clearly related to, its program. affecting it—how large a building, whether to
• Fourth, healthy capital structures are diffi- finance it or not, how many computers, etc.—
cult to maintain in nonprofits because there often not only affect organizational capacity and
are restrictions on nonprofit assets; this creates program, but also affect the financial viability of
a “super-illiquidity,” or lack of financial flexibil- the operation.
ity, that makes it difficult to keep the “business”
aspects of nonprofits functioning well. Capital Structure Pushes
Nonprofits Organizationally
What Is Capital Structure? Growth and change affect capital structure—
Capital structure, as described in the “Elements more students means more desks, chairs, com-
of Capital Structure” box (see p. 8), is the distri- puters, and teachers, and therefore more space,
bution, nature and magnitude of an organiza- cash and receivables. Expansion of program
often elevates complexity, often with greater proportions of new works the artistic director was planning.
fixed assets, as well as implied longevity of the So we decided to create our own performing
fixed costs, current institutional and programmatic identity. space. The board was enthused and raised $2
This has a profound effect on the long-term million…but…now we need more operating
freezes resources effectiveness and flexibility of the program itself, money to fund production costs and operations.
and it tends to fuel more growth and change (and It looks as if the artistic director needs to do
and pushes the need for capacity building). nothing but raise money full-time for the next
Let’s build on the example above with an eight months. That knocks out the first part of
program growth account of how a change in capital structure—in the season that he’s supposed to choreograph.
this case the drama of a new building—can We realized this last week and we’ve already
beyond what is affect program and organizational capacity. announced the season with his works.”
Organizations whose leadership anticipates The image here is the well-known drawing
healthy to the need for an overall growth of assets to from The Little Prince where a boa constrictor
accompany the massive growth in “property, has swallowed an elephant and ends up looking
maintain quality. plant and equipment” typically have the greatest like a man’s hat.
success in managing the construction of new An inappropriate capital structure often ele-
buildings. Without such attention, these projects vates fixed costs, freezes resources and pushes
pose major hazards even when the bricks and program growth beyond what is healthy to main-
mortar are all in place. The investment looks tain quality. In the example above, the point is
great on paper, expanding the organization’s not that buildings are bad, but that planners of
unrestricted net assets. But program success these projects must understand the bigger
requires that cash be maintained in balance with picture—and the need for growth of the whole
the new building, or the program will be hurt. balance sheet and operations, including, most
This is intuitively obvious with respect to the importantly, the program—to fully realize the
need for cash and, generally, unrestricted great potential of a good capital project.
revenue. It may be less obv ious that ca sh While not all effects of an unplanned change
reserves need to be expanded or rebuilt as part in the balance sheet are as dramatic as these, the
of the new capital structure. These expansions, result of inadequate and unbalanced capitaliza-
which need to be relatively permanent, might tion is a systematic under-investment in your
take the form of expanded reserves or credit enterprise as a whole, which over time will
lines, which will be needed to finance the undermine organizational capacity and achieve-
expanded business cycle (more students means ment of the mission.
higher receivables, a bigger payroll, more insur-
ance to prepay, and therefore potential cash flow Core Business Differs from Program
concerns). Or they may take the form of perma- The notion that “programs” differ from “busi-
nent working capital to finance programmatic nesses” is not widely understood in the sector.
and administrative needs generated by the Nonprofits, reasonably enough, are typically
growth: more marketing, program development, grouped, evaluated and funded based on their
administration and development staff for the programs—such as social services, arts, educa-
larger enterprise. tion, health, etc.—because program and mission
Intermittent cash flow problems, inadequate are primary.
reserves and raided endowments often result from Funders, however, don’t give mission or
a lack of such planning. In turn, these cash flow program; they give money, which is converted
problems lead to imbalances that starve discre- into program accomplishments via operations.
organization is in its
development.
Capital-Savvy Principles for Grantmakers
Focus on the Core Business • Organizations in periods of growth (as well as start-
• When you make a grant, know that you are really up and turnaround) are made particularly vulnerable
funding an underlying business, which supports but by grants that are not supportive of the core business.
is separate from program. Identify the business, and Again,capital needs can be extraordinary in relation-
design grants that honor its dynamics.Don’t fool your-
ship to overall budget during these periods.
self that you can invest funds directly in program or
discretely for program. Restrictions
• Understand the capital needs this nonprofit business • The stronger the restrictions on a grant,or the greater
will have over time, and make sure the leaders of the the fixity of assets acquired with that grant or loan,
nonprofit understand them too. Make this under- the higher the risk to the organization.
standing explicit—for you and your grantee—with
• Be aware that any restricted grant creates expense
income statement and balance sheet projections.
for your grantee.This increases the burden to raise
• Design financial investments—grants, loans or
unrestricted cash to cover this expense in direct pro-
capacity building help—to support that business
portion to the size, complexity and degree of restric-
over time.
tions on the granted funds.
Be Sensitive to Transitional States (Growth,
Start-up, Turnaround, Merger) Consider the Whole Organization
• When nonprofits grow they almost always require • An organization is a system:endowment,cash,facil-
increasing fixed overhead costs in proportion to total ities, technology, human capital, capacity—all are
budget,beyond what is typical in regular operations.
interdependent.Changing one changes all the others.
Like when you buy a too-big dress for a quickly
Funding only one creates a draw on all the others,and
growing child because you know you won’t be able to
afford another for a while, growth happens on a building capacity in one requires that capacity be built
steady curve, while organizational capacity is often in all others.
built in leaps. —Clara Miller
T
he elements of capital structure are represented on an organi- steady downward trends in alumni giving,enrollment and tuition,and
zation’s balance sheet as divided into assets, liabilities and net the quality of its student body.
assets. Our discussion of capital structure focuses primarily on Receivables represent money due to an organization.They reflect
some observations about assets and the way they are allocated, business cycles and are financed by cash.Typical receivables might be
although all are important. fees due from the government for services rendered, or capital cam-
Major assets are: paign pledges,or credit card receivables for merchandise or subscrip-
• cash tions, or billings for services such as educational programs or classes.
• investments Inventory is similar,in that cash must be laid out with the expectation
• buildings and equipment that revenue will come in as a result of sales. For both inventory and
• receivables,inventory,and prepaid expenses. receivables, there is collection or sales risk.In some cases, receivables
In the nonprofit world, funders routinely place restrictions on the are use-restricted (such as in government programs or in the case of a
use of funds. These include all assets and net assets, which are pledge for a specific purpose).
restricted in different ways.These restrictions can accentuate existing Liabilities are the other side of the balance sheet equation.Liabil-
challenges to liquidity posed by increasing fixed assets or receivables, ities include various accounts payable (your organization’s financial
for example. Most puzzling to visitors from the for-profit economy, obligations to investors and vendors), short-term debt, long-term
restrictions can even make cash and investments illiquid under certain debt, etc.They also include promises to provide services, such as day
circumstances.Let’s look at the main components. care (deposits for slots), school (tuition paid in advance), contract
Cash and investments may be unrestricted—available for use advances (social services),or ticket sales for performances yet to occur.
for any purpose—or restricted, permanently or temporarily. Restric- In many cases, liabilities represent the source of cash for financing
tions on use are typically placed by donors, government, or in some assets:the mortgage on the building; a line of credit to finance inven-
cases, internally. Most organizations have some cash that is unre- tory; or a cash flow loan against a school district contract are all loans
stricted and used for ongoing operations. Sometimes this is referred payable.They are broken down into current liabilities (those requiring
to as working capital. Other cash (or frequently investments) is cate- payment within one year) and non-current liabilities (those requiring
gorized as reserves (cash set aside for specific purposes such as build- payment beyond one year).Liabilities are organized on the balance sheet
ing repairs or to fund cash needs for predictable business cycles),and by increasing maturity (short-term to long-term), much as assets are
temporarily restricted funds (cash meant for a specific purpose or time listed in order of decreasing liquidity—from cash to fixed assets and
period as stipulated by the donor).A third category of cash and invest- endowments.Matching the relative liquidity of assets and the longevity
ments is permanently restricted—most often “endowment,” a per- of liabilities is important to keeping the capital structure in balance.
manent source of subsidy for the organization.This means that cash The difference between assets and liabilities is the organization’s
and investments aren’t always liquid—in fact, depending on a non- net worth, or net assets.The nature of the assets and liabilities indi-
profit’s core business,they often are illiquid. cates the varying degrees of flexibility in operations.For example,the
Endowment ties up large blocks of funds that,all other things being lion’s share of the “unrestricted net assets”of many organizations con-
equal,the organization might put to use in other ways as it grows and sists of plant and equipment because the building may be free of
develops. While endowment can support sustainability where funder restrictions.But this is hardly a source of ready cash.When cash
mission-driven programming needs subsidy,the opportunity costs are net assets are restricted by the donor—to endowment for example—
high.And while the security of an endowment may be appealing and liquidity is also restricted.Therefore,a positive balance in net assets is
provide a financial cushion,it can also enable organizations to become not the same as liquidity. It is the liquidity of an organization’s net
disconnected from market realities.One example is a secondary school assets—i.e.,unrestricted cash net assets—that has the greatest rel-
that uses its substantial endowment to cover up cash shortfalls year evance to its cash flow and ability to respond to needs and manage its
after year,and—to the detriment of its long-term health—ignores operations well.
—Clara Miller