Wednesday, September 3, 2014

After the Ice Bucket Challenge: What to Look for in the ALS Association Financials

As the viral fundraising success of the Ice Bucket Challenge winds down, many have shifted their focus to inquire about how the ALS Association will make use of the windfall. For an organization that began the year with $20 million in net assets, the infusion of $100+ million of unrestricted cash represents a serious opportunity. Though there will be much speculation in the interim, I suspect our first real glimpse of their chosen strategy will come with the release of their next financial statements (year ended 1/31/15). Here I briefly describe what to look for.

As I see it, a charity that finds itself a recipient of a sudden windfall has two basic options (or a combination thereof) – save up or scale up.

Save Up
One approach is to treat the new funds as a one-time infusion and to try to smooth the benefits over a long term. At the extreme, this entails treating the funds as a permanent endowment by investing them and spending only the (long-run) returns on investment. More broadly, though, the idea is to take the one-time gift and spread out its use over a long term. This approach reflects a realization that the new funds are a one-time occurrence, unlikely to be repeated. If the ALS Association takes this approach, we are likely to see a large increase in its net asset balance (which started 2014 at $20 million), accompanied by a similar increase in its investments (which started 2014 at around $8 million).

Scale Up
The save up approach offers a prudent and safe strategy, but also may run counter to the urgency the cause demands. Scaling up entails putting the funds to use right away. There are two distinct ways of scaling up, however. The first is a one-time expenditure, which again views this inflow as a one-time revenue stream. If the organization opts for a one-time scaling of operations, we are likely to see a large increase of program expenses in the form of grants or other commitments, and only a modest increase in net assets.

A second scaling up option is to make financial commitments that are likely to be spawn additional future costs. This approach reflects a view that the revenue stream could be repeated. Though history suggests that organizations who benefit from a sudden influx of public contributions are likely to see such contributions drop precipitously, that hasn't stopped others from falling into the trap of committing resources as if the revenue streams will continue. If the organization opts for such a long-term scaling of operations, look for additional program expenses that come in the form of higher salaries/payroll and/or joint costs. This approach is also likely to see greater fundraising expenses (hoping to turn the Ice Bucket Challenge donors into repeat donors), and any increases in net assets would be accompanied by increases in buildings or equipment, rather than investments.

Of course, the organization's approach is likely to be a combination of all of these, but the relative size of them in the financial statements should reveal a lot about how the ALS Association plans to use the funds.

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