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Trainee /2nd Company Article

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Momof3darlings

Learningdance-by funding cycles, I was discussing the difference in a corporation who is for profit and is able to bank funds for the future differently from a non-profit who cannot show a profit each year.  So when non-profit projections don't meet, such as may happen when Nutcracker does not sell as well as expected, then the budget is immediately affected.  Whereas a corporation may be able to pull from past saved funds to bail out the short term deficit.  

So, as an example, this shows the reason why in February or March, company members must determine if they will re-sign a contract, why most budget for the next year in Feb/March, why auditions are in April-ish, why contracts don't go out until Mar-May when the new budget is approved.  It is also why there may be late hires in the summer when a Capital Fund drive goes unexpectedly well.  No carry over to fund the next year contracts per se.  Now this is not exactly how it works, but not for profit means not for profit, legally so is a loosely based description.   They are allowed reserve funds, but generally those are not enough to fund an entire season in it's totality.  

National Council of Nonprofits is a good place to get questions asked about things like reserve funds, etc.  

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learningdance

Very helpful Momof3. .  I think that understanding the "boring" business side is so integral to survival. 

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JKK

Another oddity of non-profit funding is the fear (real or imagined) that donors will scale back if an organization has sizesble, unrestricted reserves. Sort of a “you have so much money, why are you asking me for more?” Also, many (all?) foundations require that grants be spent in a prescribed time frame, further exacerbating the cash flow issues.

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Eligus

JKK --

 

10 hours ago, JKK said:

the fear (real or imagined) that donors will scale back if an organization has sizesble, unrestricted reserves

Honestly, I feel the way you just described, and I'm not a huge, wealthy donor.  Clearly, taxes and accounting were never my strong suits in my educational years, but I agree with Learningdance that understanding the boring side helps with survival (not sure I think it is "integral to survival" -- but it certainly helps your DD to position herself better).

Those who are business savvy:  Am I totally naïve and silly to be questioning why a non-profit corporation is "sitting" on large, unrestricted reserves?  I struggle with my perception of "non-profits" who appear (to my perhaps uneducated eye) to be somewhat abusive of the non-profit status.  Perhaps I'm just not understanding the scale of the budgets.  I'm not saying non profits should always be operating on a shoestring budget... but they're supposed to be (ahem) NON-profits, right? 

This question might be off topic, but I'm curious and I'd love to be educated:  Is there some sort of a "balance point" written into the regulations where the corporation is being a "good steward" by having (in essence) a savings account for emergencies/bad years versus continuing to accumulate wealth for wealth's sake? 

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Momof3darlings

Eligus-I could be wrong, but I believe non-profits are allowed to have the same sort of reserve we should have in our own budgets.  A reserve is not profit, it is continued operating expenses so that the non-profit doesn't have to close doors until the new budget is funded.  Maybe instead of reserve consider it a roll over so that any small windfall doesn't shut the doors.  

Having seen many ballet companies that have folded over the years, the 6 month projection of reserve seems about right.  At least this would account for those who fold mid-season.  Rolling funds used but new funds did not replace them.  However, the are reserve funds and there are having too much in reserve funds.  

With that stated, most ballet companies struggle to fund themselves so any reserve helps make sure dancers are paid during shortfalls and shows can go on that have been ticketed for.  But when considering reserves, remember public universities are considered non-profit also.  So would we want them to have a reserve as a donor?  You betcha!  

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threegirlpileup

I have recently become treasurer for a non-profit organization, so I have been learning about this very topic.  It's correct that an appropriate reserve is considered about 3-6 months of operating funds.  Generally, reserves should be at least enough to meet the next payroll, and should no exceed 2 years' budget.

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JKK

The word “profit” in “non-profit” does not mean “non- net earnings.” Instead, it means not to the benefit of private concerns. A perhaps better reference is “public benefit organization.”

In the words of the IRS:  “The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization's net earnings may inure to the benefit of any private shareholder or individual.”

I’m skeptical that the IRS or even state laws impose limits on retained earnings, but I am too tired to look it up (sorry!) and so few 501(c)(3)s have that luxuary regardless. Those that do have significant excess funding tend to have it stowed as endowments in dedicated foundations, likely due to donor demand and/or strategic business/legal benefits, thereby drawing only a fraction (i.e. earned interest) for annual expenses.  

For parents with the desire to learn the wiley ways of the “public benefit organization,” I think this can be vital in helping our dancers navigate an already ridiculously perilous path. As part of my homeschool social studies curriculum, I am teaching my DD10 about the difference between private businesses and public benefit organizations. As I am quite sure this is not Common Core, I do this nearly exclusively because of her ballet aspirations 😂.

And just when I think my efforts are completely in vain, she says to me in the car (driving back from ballet, of course): “So if private business makes more money because so many people want to go to a Taylor Swift concert that ticket sales cover the costs of the concert plus profit, what are we going to do when all the old people  who donate to the ballet die?” 

I would have preferred “senior citizens,” but yes, exactly.

 

 

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Eligus

OMG, JKK.  Thank you for sharing that incredibly precocious and precious moment of enlightenment.  You and your DD made me laugh, this morning, and I sorely needed that. 

I also appreciate your insight into IRS/state law regulations.  It's definitely interesting.  And I'm thankful that you are teaching your DD this information.  She will be a force to be reckoned with in the future.... Educated consumers always are.

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