The value of economic and financial analysis tools, balance sheet and ratio analysis, financial reporting, controlling, risk management, balance sheets, financial reporting, controlling, risk management and other numerical tools for non-profit organizations and projects.
But how can we even question their value?
In 2023, Linkedin introduced a new communication opportunity among its members: collaborative articles[1]. These are short articles, subdivided into 5 or 6 blocks, written and driven by artificial intelligence. The system invites members of the social network who, according to their profile and publications, may be experts or interested in a certain topic to enter into debate, meet other experts and contribute their comments to expand their networks.
And you get the picture: I received one such invitation to participate in a publication concerning this article.
The question was, “What can the tools of financial analysis bring to non-profit organizations? Just like that, without anything else[2]. If I didn’t know it was a question that was actually asked in the industry (not just in the collaborative social networking article), I would think that artificial intelligence is still not as smart as it claims to be.
I was urged to clarify in my blog this very strange question for me. Strange, because:
Firstly, the tools of transparency and business analysis are not only financial, but also economic. In other words, the question is curiously incomplete – without prejudice to other instruments such as controlling, risk management, etc., which in such a generic question could have been mentioned as well. Above all, I dare say that economic analysis tools are of greater importance for a company in the cultural sector than financial ones. Perhaps the question was intended to focus only on one part of the subject. It is possible, but then I find the comments and answers of the so-called experts even more curious.
Secondly, I fail to understand the question, except from the point of view of someone who keeps misunderstanding the term “non-profit”.
Those of us who come from the legal and business sector are unable to conceive of a company, in the broadest sense of the word, without the use of all these tools of business planning and control. As we know that the legal personality of an organisation only affects the applicable regulations, we understand that, in the end also museums, theaters, auditoriums, orchestras, production companies and the like are companies, regardless of whether they have been set up as civil or commercial companies, as foundations, associations, cooperatives or any other legal personality provided for in the different legal systems.
The big problem now is that, as the law calls some of these entities or organisations “for-profit” and others “not-for-profit”, it appears that a large number of people believe that those that are not for profit are not enterprises; that they do not generate secondary responsibilities of their founders, partners or whatever their name is; and that they do not need these numerical tools and, therefore, do not need these tools of business planning and control.
In plain language, entities that want to make money to make a profit are companies and the others are… well, here I don’t know what they are because they are also companies or at least they should be managed and run as if they were. Full stop.
People misunderstand the expression “non-profit”. Very much so, indeed. It is meant literally.
Speaking of which: curiously, the same society is also capable of linguistically allowing people to say that a self-employed person who works alone in his or her small beach bar has a company. Oops!!!! A self-employed person is not a company. In any case, it is an individual entrepreneur.
Either way, t is so easy to consult. No, not the RAE (trad: Real Academia Española = Royal Spanish Academy of Language), but the law, or at least a legal dictionary (I recognize that laws can be confusing for those who are not used to reading them).
Let’s take a look at the definitions:
Non-profit entities: Their purpose is to invest all their resources free of expenses in their social purposes. This is what is legally defined.
For associations, the Law on Associations states in Art. 1 – 2:
The right of association shall be governed in general by the provisions of this Organic Law, within whose scope of application are included all associations which are not for profit and which are not subject to a specific associative regime[3].
More specifically, in the Law of Associations (Canary Islands), Art. 2 – 2, we have that:
An association is considered to be non-profit-making, even if it develops an economic activity, if the fruit of such activity is exclusively destined to the fulfillment of the common purposes of general, mutual or sectorial interest established in its statutes[4].
For foundations, we can find in the Law on Foundations, in its Art. 3 – 3:
Under no circumstances may foundations be set up with the main purpose of allocating their benefits to the founder or the trustees, their spouses or persons linked by an analogous relationship of affectivity, or their relatives up to and including the fourth degree, as well as to singularized legal persons who do not pursue purposes of general interest[5].
While we are at it, let us also look at what is meant by the term “company”.
Company: There is no definition of the word “company” in the Spanisch Commercial Code, because the term does not really have legal recognition as such.
However, there are multiple definitions in the literature. Mine would be the following: A company is normally an organisational unit, a complex system, consisting of a legal personality, a civil or commercial company – although it can also be an association or foundation – engaged in certain activities, with or without profit-making purposes, mostly lasting in time, together with the share capital, assets and liabilities, the people and the processes behind it.
Even so, the Spanish Commercial Code recognises the term “entrepreneur” – both the individual entrepreneur and the various companies. Compulsory accounting and bookkeeping are linked to it.
The different rules applicable in each case (laws and regulations) define exactly how the books and accounts are to be kept and which analysis and transparency tools are mandatory for each type of entity. The basic law is usually the yet named Spanish Commercial Code, which already mentions the bookkeeping of entrepreneurs, but the specific national and regional legislation for each commercial or civil company, association, foundation, etc. must also be considered.
Namely: Non-profit does not prevent making money and profit.
It only requires that the profit generated be reinvested in the social purpose.
Therefore, I affirm that the knowledge that leads to profit in the private sector can and should be applied to all kinds of entities, organizations or companies in the tertiary sector, too. There will simply never be any dividends distributed in a non-profit organization.
If we generate profits in our association (to give an example), we will have maybe one more exhibition or concert next year. Perhaps it will generate the necessary liquidity to renew some of the assets (instruments, music scores or air conditioning) or to expand fundraising and audience development activities. The latter, in turn, can lead in the second, third or fourth year – hopefully – to even better results.
At least this is the basic thinking we should keep in mind, instead of continually complaining about lack of sponsors, reductions in public handouts or doubting the usefulness of something that is useful for the entire market.
With this in mind, it remains to clarify that of the many numerical analysis tools, some are legally compulsory and others not. Let’s face the question: What if, in a case of such as non-profit organizations, not all tools are mandatory? Actually, this is indeed the case. Not all of them are mandatory. Answer (and, please, note the irony): At least, these we do not use. Let’s not complicate our lives. Oh, no!!!
Quite simply, if we don’t want to go bankrupt in the attempt, let’s apply these tools as a matter of common sense. Yes, yes, also in the non-profit sector there is a personal responsibility of the partners, promoters, founders, administrators, etc. Don’t forget that.
The legal imperative is due to the fact that commercial and free trade requires basic conditions of information and trust. As companies grow, so do the risks. The law guarantees basic transparency for all natural and legal persons operating in the market. This is why it requires orderly accounting, the keeping of certain books, the issuing of annual accounts with balance sheets, etc. The companies with the most documentary obligations are probably those listed on the stock exchange.
However, not being obliged to set up a normal accounting system (but rather a simplified accounting system) or controlling does not mean that we are prohibited from using it. If we are not obliged to carry out a comprehensive balance sheet analysis – often we are not even subject to the requirement to draw up an annual balance sheet – this does not mean that we are not allowed to use it.
Fellow lawyers and economists will forgive me if I speak in such a simplified way, but you will know that I am not writing for you. You do not need me and you probably know the subject better than I do. I always write for the reader without prior knowledge and I still perceive everything said here as too complex.
So let’s summarize all these ideas in a few pictures to better understand what I mean.
PICTURE 1: The short-sighted pilot
Not using our numerical gadgets would like putting a short-sighted – or directly blind – person commanding a plane with 350 passengers on board. Savvy?
In other words, I cannot conceive of any purpose-driven organizational unit, any long-term project or any company without at least one application of these tools (adapted to the size and volume of business, of course).
No, and the autopilot does not work for me.
PICTURE 2: No air, no life
Let’s see if this makes it even clearer.
With this blind way of conducting our business, we have an expiry date. It is as if we were strangling ourselves. We take away the air we need to breathe. We will never be sustainable over time if we run our cultural enterprise with the RAE under our arm instead of the law. By the way, the Spanish General Accounting Plan (Chart of Accounts)[6] is also an act (a royal decree to be more precise). After all, everything ends up in the law. Even economics. I am sorry to have to remind you of this. And common sense as well.
But how are we going to make any decisions for our orchestra or theatre – both day-to-day and strategic – if we don’t even know where the money is coming in? Or more importantly, where the money is going out – let’s not forget: we belong to a sector where more money usually goes out than comes in! All the more reason to do so.
Let’s repeat: What can economic-financial and other analyze tools bring to a non-profit company?
They guarantee its longevity and give it the air to breathe. It is as simple as that.
In my humble opinion, there is no need for more reasons. It is the ultimate reason.
Now, let’s proceed to the final test of this lesson:
My readers will now be able to tell me (I hope) why so many companies in the tertiary sector are always financially suffocated and on the verge of dying.
Right, they are short of breath. GOOD! All passed.
They lack a management that knows how to set up a controlling system[7] as well as a risk and compliance management system[8] (beyond accounting, etc.), to fly the plane with proper glasses or give air to our project to live (i.e. sustainability).
The instruments and tools of analysis, control and transparency go hand in hand. They are interconnected and interrelated. They are autonomous and linked to each other at the same time. To get a true picture of our project (company) I need them all, in some way (obviously adapted to the specific case). By law or by the common sense of a good cultural manager!
Nicole Martín Medina
Las Palmas de Gran Canaria
June 2024
(Original in Spanish, written according to Spanish Laws,
translation Deepl, Revision NMM)
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The article is also available in:
GERMAN: https://nicolemartinmedina.com/de/w-f-analyseinstrumente/
SPANISH (Original): https://nicolemartinmedina.com/herramientas-analisis-economico-financiero/
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Footnotes:
[1] Please see: https://www.linkedin.com/help/linkedin/answer/a1453033/artigos-colaborativos?lang=es-ES
[2] Please forgive me for not saving the link for easy access. It was my first participation, and I was not yet familiar with the new tool, nor was I planning to publish on this topic at the time. Looking now for the reference for this article, there is no way to find it again.
[3] Spanish Organic Law on Associations: https://www.boe.es/buscar/pdf/2002/BOE-A-2002-5852-consolidado.pdf5
[4] Law on Associations(Canary): https://www.boe.es/buscar/pdf/2003/BOE-A-2003-6500-consolidado.pdf
[4] Spanish Law on Foundations (national): https://www.boe.es/buscar/pdf/2002/BOE-A-2002-25180-consolidado.pdf
https://www.boe.es/buscar/pdf/1998/BOE-A-1998-10523-consolidado.pdf
[6] Spanish General Accounting Plan: https://www.boe.es/buscar/pdf/2007/BOE-A-2007-19884-consolidado.pdf
[7] I will be writing in more detail about these issues here on the blog in the near future.
[8] I have published a series of three articles on controlling. See (only Spanish available):
https://nicolemartinmedina.com/10-razones-controlling-en-orquestas/
https://nicolemartinmedina.com/los-instrumentos-del-controlling-2/
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Bibliography:
I highly recommend, for German-language readers, the following two publications:
- Controlling mit Blick des Musikers – Job & Karriere CJ 3/2017 (trans.: Controlling from the Musician’s View) – Interview by Wolf von Rechenberg with Beat Fehlmann, Deutsche Staatsphilharmonie Rheinland-Pfalz.
CJ_Interview_Blick-des-Musikers
- Compliance & Governance – Kultur weiterdenken – KMC – Das Magazin von Kultur Management Network – Nr. 176 | January/February 2024 – (trans.: Compliance & Governance – Thinking further in culture)
