0.13 Chapter ten: the complexities of nonprofit financing  (Page 5/10)

The fact that the Society delayed its closing by finding cash through loans and other means was by no means an entirely positive development. These loans were obtained even as the Society continued to run significant operating deficits. The natural consequence was that the Society continued to dig itself into a deeper financial hole. Simply put, it is one thing to borrow money to cover temporary shortages of cash when one can predict future receipts with confidence; it is quite another to borrow cash simply because one has run out of it.

Sources of unrestricted income

Beyond the distinction between restricted and unrestricted revenue streams, there are also different types of unrestricted income. The major sources of nonprofit operating income can be broken down into four categories: earned income, gov­ernment appropriations, private contributions, and investment income.

Over the course of its history, the Society has depended almost exclusively on private contributions to support its activities. As was explained in Chapter Nine, the Society's collections do not generate revenue, so earned income has never played a major role. Earned income from such things as admissions, contributions, royalties on publications, gift shop sales, and facility rentals have averaged only 8 percent of total revenues since 1960. As for government support, except for $2.6 million in transitional funding appropriated following the Society's 1993 crisis, the public sector has provided essentially no unrestricted support in recent times. The responsibility for supporting core operations of the Society has fallen on private giving. The annual revenues from these gifts break down into two different forms: (1) investment income earned on previous endowment gifts and (2) unrestricted contributions.

Before discussing the implications of these two types of income streams, it is important to point out that when private contributions are received by an organization, its board may have some discretion in determining whether each gift should be categorized as a current gift or a capital gift. For the most part, unrestricted gifts are spent when they are received; however, when an organization receives a large one-time gift or bequest, the board should consider categorizing the gift as capital and adding it to the endowment. After all, the large bequest is not truly operating income; it will not be received in subsequent years.

An example will help emphasize the importance of this point. Over the course of eighteen months in 1985 and 1986 (the Society converted to a June 30 fiscal year in 1986), the Society received more than $2 million from the estate of Clara Peck. The cash received from this gift was recognized by the Society as current unrestricted operating income. Consequently, in the year-end statements for 1985 and 1986, the Society registered a significant surplus.