Flipping the financial script
Your income statement tells the tale of how (and why) money drives your business. Don't share the wrong story.
“All the world’s a stage and most of us are desperately unrehearsed.”
—Sean O'Casey
It’s easy to forget that the nonprofit arts organization was not cut from whole cloth. Rather it was assembled from available parts – many of them designed and developed for the for-profit commercial world. And yet it seems a constant surprise that those parts don’t always fit.
Take, for example, the income statement – a financial report taken “off the rack” from for-profit enterprise and applied to nonprofit ventures. An income statement has a “top line” of revenue and a “bottom line” of profit or loss. In this story, revenue is the beginning and profit is the end. Expenses are the plot twists and the hero’s challenge in between.
The Profit-Driven Income Statement
Revenue
- Expenses
= Profit (or Loss)
That is not the story of a nonprofit enterprise.
For a nonprofit, the driving story is about purpose. That purpose comes at a cost. The financial story begins, therefore, with expense – with the “cost of mission.” Along the journey, earned revenue covers some of that expense, but not all of it. The remaining expenses define the “need for subsidy” and the opportunity for fellow travelers to share the burden of a common goal.
The Purpose-Driven Income Statement
Expenses (cost of mission)
+ Earned Revenue (recapturing some of the cost)
= Result of Operations (need for subsidy)
+ Contributed Revenue
= Net Surplus (or Deficit)
In short, the nonprofit story begins with expense and ends with a chasm (deficit) or a bridge (surplus) for the journey to come.
Many nonprofits acknowledge this essential shuffle when building their budgets. They start with program planning and the expenses they represent, then they project the earned and contributed revenue those programs might attract. If things don’t add up, they revisit the cost of mission and reimagine the many paths to revenue.
Still, when it comes to public financial reporting, most nonprofits are still entangled with the for-profit story line. So it’s up to thoughtful arts managers to remind themselves and those around them not to lose the plot.
POEM SOURCE: Chang, Victoria. The Trees Witness Everything. Port Townsend, Washington: Copper Canyon Press, 2022. Also available as a lovely letterpress card from Expedition Press.
Photo by Patrick Tomasso on Unsplash
From the ArtsManaged Field Guide
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