Does the term ‘NFP’ infer a loss is OK ?

The term NFP (not for profit), for those unaware is a shortening for ‘not for profit of the members’. With many charities being associations of members the term refers to the requirement that no profits are to be distributed to the members. Unfortunately in my travels this is not widely understood outside the sector, and also too I should add in many instances within the sector.

An issue that rises it’s head time and time again with this term has arguably lead to a perception that a loss is acceptable. It is a tough topic that no doubt will raise the ire of many but a charity loss arguably does not serve the mission and does not serve the outcome in any argument of sustainability. Yes there may be instances where a loss is acceptable but an NFP with continued losses with no strategic reason will undeniably fail their mission.

The recent AICD NFP Governance and Performance Study noted that the sector has many instances of where financial sustainability is not clearly understood and or appreciated. It noted that many Boards had issues with reporting a positive surplus in their annual report. One of the reasons that came up often within the AICD survey was that this would deter potential donors via the perception that they ‘did not need the money as much as others would’. With the number of charities in Australia at record numbers this clearly presents a warning of vulnerability if this cultural mindset continues. Quite simply the greater the sustainability of the enterprise the greater chance of achieving their mission, and the converse, i.e. the lower the sustainability the less available to equip the enterprise resource wise for their raison d’etre or less eloquently…… ‘solve the problem’.

In light of the above would the term For Purpose Organisation (‘FPO’) be a better descriptor? This does not have overtones of loss acceptability and aligns itself closer to why charities exist, that being outcomes.

Further within this debate is the issue of outcomes reporting. The reason for being of a corporate entity is to maximise value for the shareholders, which is easily measured by way of financial perfomance. But what of charities? Sure they can report their financial performance but this is not their raison d’etre – yes it is important in light of sustainability issues as I have highlighted above but what framework exists to communicate their progress towards their mission? This is not a new conversation and has been the driver globally of the Integrated Reporting Intitiave and also the Global Reporting Initiative and locally the efforts of the Australian Accounting Standards Board with ED270. A long way to go but will be a fascinating debate along the way …..