Expanding on the argument for equity holders in the nonprofit sector, there has been a call for restructuring nonprofit accounting standards (FASB) to introduce equity capital. The idea, proposed by Sean Stannard-Stockton, from Tactical Philanthropy, and George Overholser of the Nonprofit Finance Fund, is that we make a distinction in nonprofit accounting between revenue used to buy services (nonprofit operating revenue) and revenue used to build the nonprofit organization (philanthropic equity). For too long nonprofits have been forced to carve out a piece of their ongoing operating revenue to build the infrastructure necessary to do their work. That means that the infrastructure is ultimately lacking and the sector is undercapitalized.
In order for nonprofit organizations to become sustainable we must provide them the capital necessary to build their capacity and their infrastructure. A nonprofit organization should not have to scrape together operating revenue in order to hire a Development Director, or forgo an earned income venture because they can’t find the initial investment required to make a go of the business, or not grow to scale because they don’t have the infrastructure to ensure that the program quality will survive growth.
The idea is simple, yet profound. If we make a simple distinction on the balance sheets of our nonprofit organizations, we begin to recognize and have the ability to analyze the strength of the organization that is delivering the service. In addition, nonprofits gain the ability to fundraise for philanthropic equity, or capacity capital (as I discussed in an earlier post), to build a stronger organization instead of apologizing for the “administrative costs” of the organization.
Once we make such a simple change we can start to understand which organizations are effective and which aren’t, which require further investment and which do not. We start to create a structure and a system around which we move away from the increasingly dangerous position of taping together our social benefit delivery system and move to a much stronger position of well-capitalized, fully functioning, efficient organizations that are effectively delivering critical services to our society.