Full Cost: What Some Nonprofits Need
Debt Principal Repayment, Fixed Asset Additions, and Change Capital
Debt Principal Repayment
Debt principal repayments are the dollars to pay down debt (e.g. line of credit, mortgage, loans, other forms of borrowing, etc.)
Debt can be a valuable financing tool if used strategically. It may seem obvious that when you borrow money, you need a plan to pay it back. But the structure of financial reporting can obscure debt repayment. If an organization makes a monthly mortgage payment, the principal reduction does not appear on the income statement (or profit & loss statement) as an expense. Only the interest appears as an expense. Instead, principal repayment appears on the organization’s statement of financial position (or balance sheet) as a reduction in cash and a reduction in the mortgage principal due. In other words: repayment is commonly financed through year-over-year surpluses.
Consider how quickly your organization’s existing or planned debt needs to be repaid.
Fixed Asset Additions
Fixed asset additions are the dollars to purchase new equipment, buildings, furniture, land, leaseholder improvements or other fixed assets. Fixed asset additions are NOT replacement or simple maintenance of existing fixed assets (this lives in a reserve) or small equipment purchases that are expensed.
Change capital is a large, periodic, investment into an organization to change the business model in a significant way (e.g. the size or reach of mission and/or how it makes and spends money). Change capital should be large enough to cover up-front costs of change and deficits incurred until the change is complete, when the new business model revenue exceeds the new expenses. For this reason, change capital should nearly always include adequate funds for the launch or scaling of contributed or earned revenue generating activities.
Change capital that seeks to scale programs, but does not invest in revenue generating activities, will result in short-term program expansion, followed by program contraction when the change capital runs out. This is an improper structuring of change capital.
Change capital typically comes from an external source and is ideally large, flexible, and multi-year. Capital campaigns are one way to raise change capital dollars. Change capital is not often sourced through year-over-year surpluses.
Once an organization has received an infusion of change capital, we would not expect them to need change capital again for a long time: 10, 20, or even 30 years! The total amount of change capital needed can be difficult to calculate, because it is based on future projections of how the change will roll out, including how quickly new or expanded sources of revenue will be generated.
Calculate your organization’s full cost needs with the Full Cost Workbook.