0.14 Chapter eleven: the importance of governance  (Page 3/6)

If nonprofit boards are not extremely vigilant, they can easily fall into a pat­tern of authorizing, perhaps even for justifiable reasons, levels of activity that are not financially sustainable. In December 1974, when the Society's board was debating a significant operating deficit, its third in a row, it decided, according to the minutes, that "it would be most unfortunate to lose the present momentum of the Society by cutting back activities." Ten deficits later, in 1984, President Goelet wrote in the annual report of the need "to increase our care for [the] col­lections and for our building . . . [and]to expand further our public programs." The Society's operating deficit in 1984, excluding depreciation, was $833,000, or 33 percent of total expenditures.

Putting the importance of mission over means leads to another phenomenon common among nonprofit leaders that increases the likelihood that their organi­zations will encounter financial difficulty. Nonprofit leaders tend to think in terms of the costs of operations first—"this is what we must spend to fulfill our mission"—and then to think about revenues—"this is what we need in terms of sup­port." At least in part, this expenditures-first approach is probably a legacy from the days when managing a nonprofit institution was a simpler endeavor. As one leader of a large cultural institution put it, "Art museums used to be run privately. At the end of the year, you would do your books, there was a deficit, you would sit down with your trustees, they would pass the hat, and that was that. But that isn't possible anymore."

Nevertheless, there remain many organizations in which expenditure levels drive revenue projections. This approach may work perfectly well for stable institutions with predictable revenue streams, but for more inconstant entities, it can result in plans that depend on meeting unattainable fundraising goals. The Society's 1988—1992 bridge plan, which was explicitly based on an effort to increase revenues to meet a preset level of expenditures, offers a case in point. After the plan resulted in deficits in three consecutive years, Society leaders acquiesced, stat­ing at a 1992 meeting that "as we have not been able to achieve the goal of rais­ing revenue sufficiently to meet expenses,... we must now examine whether it is feasible to reduce expenses to match assured revenues." A more balanced ap­proach might have held more promise. During the planning process, nonprofit leaders need to think less in terms of what their organizations must do and more in terms of what they realistically can do.