Tax Status

There’s a Bruce Springsteen song called 57 Channels. At some point in the song the chorus comes in like a chant where The Boss lets us know that there’s 57 channels available on his cable box and still, there is nothing on. Specifically he sings “57 channels and there’s nuthin on…”. To the younger readers I feel the need to explain a few things. Before the advent of the world wide web and streaming services, but after the introduction of color TV, we had the glory days of cable. This was literally a cable that was strung to your house and plugged into a box that then plugged into your TV. Basic cable packages took you from the simple five channels you could pick up on your antenna and were free, to eighteen channels with things like sports, news, cartoons and reruns of all the classics. If you lived in a fancy house, that package crept up to the mid 30’s. If you lived in an upper-class neighborhood, you got 57 channels.

That package included some “premium” channels like HBO and others that only our parents were allowed to watch sometime after 11:00 pm. No idea what they were watching. All I know is that our dad drug his feet. He saw little need for cable in our house. Five channels were good enough for him growing up, it would be good enough for us. Besides, what were we complaining about? Those five channels were all in color! That is of course until the America’s Cup sailing race was covered on ESPN for the first time and then he decided it was worth the splurge. We would sit up at night to watch sailboats racing in Sydney Harbor. I knew nothing about sailboat racing, but it was exotic and exciting to watch something happening “down under.” I walked around that summer calling everyone my mate and working in the term “down under.”

At this point in life, my brother who was six years older than me was deemed responsible enough by the powers that be to watch his little brother during the long summer days while mom and dad were off at work. Apparently, cable TV cost money and someone had to pay the bill. What this meant for us was quickly dialing in channel 32 which was MTV. That stood for Music Television and back then MTV actually played music videos, and ONLY music videos all day long. We would sit and fry our brains for hours on end.

And in reward for not killing me or letting me wonder off into the wilds of the urban jungle, my brother was handsomely rewarded with an allowance. We made it nine weeks into that summer break before I learned this damning fact about my older brother. He literally did nothing more than turn the TV on to the station HE wanted to watch, commanded me to sit there and shut up, and then got paid at the end of each week. I think at one point he even got a union card. For WHAT? I demanded to be compensated equal pay for watching him. Despite the age difference I was clearly the more responsible one. The union boss wasn’t having it, so I was left to shop my services on the free market to figure out how to make some money. Afterall, the economic pressures on a grade school kid are tremendous. Slurpies didn’t just grow on trees.

Trees! That’s the way I could finance my lifestyle. My parents purchased the house I grew up in with a federal GI loan. It felt big to me, but I was the smallest roommate so my scale might have been off. We had a corner lot and we were at the end of the street. Our backyard had a row of ugly trees that marked the property line and were the last remnants of an old orchard. They were deciduous trees so they lost their leaves every year. They were also a nut tree. In Oregon we called them Filberts. The nuts were encased in an ugly hard leafy exterior and the trees were prolific in their annual fruiting of nuts. My father hated them because the nuts would fall into the yard and destroy the lawn mower. So every time before mowing the yard, the nuts had to be raked and removed.

Incidentally, the rest of the civilized world calls Filberts by a different name…Hazelnuts. Had we known then that the American middle class would develop an absolute obsession with Hazelnut flavored everything a few decades later we would have cashed in then and there, but like most things in free markets, timing is everything. For now, these were just lawn mower blade destroying nuts in the yard. It was also an opportunity. My father had offered my brother and I a steady income if we raked and removed said nuts each week. My brother took a hard pass as his MTV watching/babysitting gig involved less physical labor and accountability. As a budding entrepreneur however, I took the man up on the offer and was convinced I would take him to the cleaners.

His offer looked something like this, $0.01 per nut or $0.25 per bucket. What an idiot! Clearly my dad couldn’t do math very well. My little brain which did not yet possess the ability to multiple, understood that $0.25, or a quarter to those of us in high finance, was worth way more than $0.01. One bucket was nothing versus collecting all those individual nuts. We should pause here for a little lesson on volume. When I say bucket, we’re talking the kind like the 5-gallon Home Deport bucket that you see everywhere. One bucket equals one quarter, as opposed to a penny per nut. These nuts are about the size of a peanut or the top half of your thumb. You see where I’m going right? Had I picked an entire bucket, dumped it out and counted the individual nuts, the old man would have been into me for a solid $1.50 to $1.75. He would be the first and last sweat boss to take advantage of me!

Still, I learned the value of the almighty dollar. Both figuratively and literally. I understood that a hard day’s work got a man a hard day’s pay. This is a lesson that would follow me into every job and salary negotiation the rest of my life. But my financial education did not stop there. I was really active in Scouting growing up. One of the…ahem, many…merit badges I earned was in personal finance. I learned how to make a personal budget, deposit a check at the bank, and reconcile a check book. In the fifth grade with my father’s help I opened a savings account at our local credit union and from that point on my allowance was partially deposited into my bank account. The remainder was issued tax free in cash so I had some “walking around money.”

In high school we were required to take a personal finance class in order to graduate. My schedule was so full that the only way we could make it work was to take the class via correspondence with a university. In a sense I was taking personal finance for college kids which made it that much more significant and impressive (to no one other than myself). When I hit the “real world” I was already like a 50-year-old man who was worried there wasn’t enough in our savings account. I would track the Dow Jones Industrial Average despite having no stocks of my own at that time. The point I’m going out of my way to make here is that I was no financial novice. I had a working understanding of free market economics, cost benefit analysis, and what profits and losses mean. Put me up against a panel of my peers and I felt pretty confident I could surface to the top of any financial discussion.

That is of course until my career actually started. I don’t mean when I started working. In one form or another I have been employed and drawing a legitimate form of payment and thus, been paying taxes on my income, since I was 14 years old. No, by career I mean college was done and I had picked my professional field of choice. In my case that choice was the nonprofit sector, and more specifically museums. Yeah, that’s right, I picked a career pathway where I would be both cool and rich! My brother was working in tech, my cousins in high finance and the engineering fields, and then there was me. My family and friends started to talk about my career choice like it was an alternative lifestyle. “Yeah, Mathew is working in nonprofit, not that there’s anything wrong with that, we still love him the same.”

There are plenty of misconceptions about the nonprofit field so it’s worth taking just a moment to distinguish this body of work from other sectors. Most people work in the private sector. This covers everything from fortune five hundred firms like Nike and Intel, to small business owners like Sally’s Landscaping and your local barber shop. In fact, more people in America work for a small business owner than any other category of employment. Next you have the public sector. This basically means your local, state and federal governments. Whether it’s working for the Bureau of Land Management or the fireman at the station down the street, these are examples of working in the public sector. These folks catch a bum rap for being bureaucrats and pencil pushers, but most are well intentioned citizens who want to live a life of service to their communities. Technically speaking the military is also a part of the public sector, they just do their work with an Abrahams tank. Don’t tell them they work in the public sector though, they can be a little touchy about that designation and in case you missed it in the earlier sentence, they have tanks.

That brings us the “third sector” which is how academics like to categorize and describe the nonprofit sector. The best way to describe a nonprofit is that it exists to serve a need that neither the public nor private sector is filling. It’s not a black or white definition, but in practical terms it’s pretty accurate. Just think of your favorite nonprofit. If they weren’t doing the work they do, who would do it? There are many different kinds of nonprofits spanning several different categories of activities but the bottom line to keep in mind is that unlike the private sector, they are not driven by profit motivations and unlike the public sector, the do not have an income stream from tax collections. The need they fill is the driver behind their work.

There’s something special that happens to young idealistic people when they go to work in the nonprofit sector. I’m sure there’s a technical or clinical term for it, but basically they lose their ever loving minds! They have decided they don’t want to work for “the man.” They see their cousin who went to business school, and they want no part of that existence. They are young and free and have their entire life in front of them. They want to make a difference in the world unlike their capitalistic brethren. And at least until they are in a committed relationship or have a mortgage, money doesn’t matter! Don’t even get them started on working for the public sector. They are not interested in the stability of civil service or the handsome retirement that comes from a lifetime of public service, no sir!

And that’s what happened to me. I worked for a nonprofit museum throughout my college days jumping from one seasonal or part time job to another, stringing together enough hours and income to keep going. I briefly dabbled in the public sector teasing with the idea of making teaching fourth grade my career, but the siren’s song of the nonprofit museum caused me to crash my career upon her rocks where I would remain stranded for the rest of my career (or rescue, whichever comes first). The mission of the organization and the important work we were doing in informal science education had a strong gravitational pull that I could not escape. The hook was set deep, and I accepted that the only way this ended was flopping around on the deck gutted and ready for the frying pan.

Somehow, somewhere along my journey I had jettisoned my financial literacy. It was dragging me down, getting in the way of the more important work of the mission. As a full-time informal science educator, I was unincumbered by the burden of budgets and variance reporting. I was on the tip of the spear delivering the life blood of our mission to inspire wonder in the lives of those we touched. The fullest extent of my professional financial responsibilities was a monthly reconciliation of my company issued credit card. It became so cumbersome that I took to paying for most things out of my own pocket so there was more time for mission delivery and less of it wasted on accounting. I really got the upper hand in that deal!

Even in my personal life, finances were an abstract concept. I married up! Like seriously up! My wife was and is way smarter than me and cared a lot more about where our paychecks were going. She insisted on managing our household finances and I was more than happy to turn over this task. It left me with more time to cook and clean and not pay bills. It was a fair trade.

Imagine my shock and utter horror when I received my first battlefield promotion and was plucked from the enlisted ranks of museum educator and placed as a junior officer managing a program. Promotions in nonprofits come with status, fractional increases in income, and most importantly RESPONSIBILITY! Finally, I could make some decisions about the very program I had toiled in and complained about to my superiors. The day had arrived when I was in charge and things were going to be different!

As it turns out, this junior level management position was heavy on the responsibility elements and pretty light on the decision and difference making. One of those responsibilities was managing my program’s budget. At $290,000 it was the most money I had ever been responsible for in my life. The total organizational budget was somewhere around $23,000,000 at that time, so my part was obviously significant, and I best not screw anything up.  At least that’s how my supervisor presented it to me. “Don’t screw it up” counts as the first genuine mentoring and budget training I was to receive. It’s specific, measurable, actionable, reasonable, and timely so all in all “don’t screw it up” was a pretty smart performance objective. Unfortunately for me, that was both the start and conclusion of the training I would receive at this level. Everything else would be learned by trial and error. And error I did!

Do you know what a variance report is? That’s ok, nobody does except some accountants who invented it to prove to the world that they are better at managing money than everyone else. Basically, this is a report where you have to explain the difference between what you said you were going to spend versus what you actually spent. Same thing for revenue. By the way, who cares why you’re making MORE money…just be happy it’s more. If it’s less, blame marketing. If they marketed more, you would earn more. Why are we reporting this every month? On the expense side, if you spend less, you are not rewarded. If you spend exactly what you said, no one is impressed. If you spend more than you said you would, you’re in trouble and you better explain yourself. This my friends is the variance reporting dance and we’ll do it the same time every single month.

That is of course if someone tells you what a variance report is, how to fill it out and when it’s due. Remember, my entire financial training was “don’t screw it up.” During my first management meeting where all the officers are assembled, the Chief Financial Officer walked in, seated himself at the head of the table, and like a maestro stepping to the podium and clearing his throat, all the various tunes halted, and everyone sat up straight. Then, one by one, he worked his way around the table signaling for each officer to sound off and report their budget variances. It was a curious sight for the uninitiated. I sat watching and listening to each of my peers give panicked explanations of their budget responsibilities. As each one reported a slow realization began forming in my mind. This was a big organization with many managers so there was plenty of time for my brain to process what was happening. But also, the sands kept falling through the choke point in the hourglass and each report given was less time for my brain to put the pieces together.

Holy hell! This was the thought that popped into my head as the person sitting to my left was giving their report. I think the Chief Financial Officer is going to expect me to give a report. Everyone else had these reams of paper with numbers on them, I had a post it note where I had jotted down three lunch options that I was going to slip a colleague so we could make plans for after this boring meeting. And then it happened. The person to my left had satisfied our financial overlord, and his steely gaze fell on to me. He didn’t need to say a word. Everyone in the room, including me, knew it was now my turn. Time to speak.

All moisture had left my mouth and gone straight to my armpits. A witness later reported to the authorities (a friend of mine in the room told my boss later that day) that all color left my face. “Don’t screw it up” was the entire wealth of knowledge I had to draw on at that moment and unfortunately for me and the authorities who had entrusted me with $290,000 I was about to screw it up. I quickly called up the files in my brain from my personal finance correspondence course from high school. The one I took that made me think I was better than my high school peers. Turns out we did not cover variance reporting so these files would be of no use. Time for the charm.

I waxed poetic to our financial overlord about the virtues of being a rookie junior officer and that I was taking a passive approach to this meeting in order to learn the customs and traditions of this strange new land. The overlord gave no indication of his tolerance, or lack thereof, for my explanation. Just a blank stare, followed by silence as I sat awkwardly fighting the blackout looming in my periphery. Honestly, I cannot recall what happened next, but something happened because the next thing I knew the person to my right was explaining why they were under budget because marketing had not spent enough to promote their program, and the dance proceeded.

Upon returning to the safety of more familiar territory, my boss came to me and said “that was like watching a slow motion train wreck, didn’t I tell you not to screw it up?” Yes, yes she had mentioned that helpful bit of advice. I decided then and there that I would never again be caught flat footed in any budget discussion again. I would need to learn the strange customs and traditions of Clan Finance. This would require months of intensive study in their native habitat. I would visit finance daily for the next three months, careful to never make direct eye contact with the alpha. I befriended one of his lieutenants. Clan Finance called him a “controller”, but I found him to be a very nice fellow and not at all controlling. He taught me their ways as best he could, even though we both knew that I would always be seen as an outsider.

I adopted their ways. I wore a suit to work, and everyone thought I was interviewing for another job. A reasonable guess given my financial prowess. I started to use phrases like “balance sheet” and “net earnings.” I carried a three-inch-thick binder to every meeting. In it was my budget, and that of my entire department and their latest variance reports. I studied them like the charts of ancient mariners so I would know how to navigate the financial currents. Once, I even helped a woman from Accounts Receivable track down a payment owed to the museum. When I arrived with payment in hand, all of Clan Finance gathered together and marked me as one of their own. Never again would I be left stammering when the Chief’s eyes landed on me at the great variance report council fire. I was now a finance professional!

The careful study of the Clan Finance served me well for the years that followed. My responsibilities grew, and with it, so too my budgets. $290,000 became $2.9 million. And then one day I ascended into the realm of Sr. Management. I was bestowed with the title of Vice President and at this moment in time became responsible for a sizeable portion of the organization. Hundreds of employees reported up to me and my budget grew to tens of millions of dollars, more than half of the total operating budget of the organization. At this level, budget takes on a whole new realm. The traditions and customs I had learned would not be enough to serve me in this new capacity. But fear not, for the Chief Financial Officer had a new custom he intended to share with me.

As a Vice President and senior leader of the organization, I would now be brought into the inner sanctum of the board of directors. Better yet, I was about to be introduced to a new shaman of the finance realm, my budget buddy. Yes, you read that right, a budget buddy. As had been done for a millennium (or at least the last 20 or so years at this organization), every budget season each vice president was assigned a member of the board to serve as their guru, yogi, and jedi master. As captains of their industry, these members of the board ran companies much larger and more powerful than ours.  They were intended to share their wisdom, their time, their talents with us and make us budget assassins. Am I mixing metaphors at this point? Bet your ass because that’s how the upside-down world of finance works. Everything you think you know about finance is just an illusion man!

My budget buddy was a nice man from a company headquartered in Beaverton, Oregon. They made shoes and some athletic apparel, and my buddy oversaw all their north America operations. It was a good pairing because I too oversaw all the museum’s north America operations. Wanting to impress, I spent a great deal of time preparing for our first meeting. He was coming to me which was a big deal. My assistant and I wall-papered my office with charts and graphs. I wrote large notes on each one, complete with weathered post-its and paperclips holding smaller spreadsheets to the large graphs. It looked like we were planning a hostile takeover of Berkshire Hathaway.

When my budget buddy arrived, I walked him through an hour of carefully choregraphed steps that would all arrive at the final version of my proposal for the following fiscal year’s budget. I was exhausted when I finally paused for questions. My budget buddy smiled broadly, the universal sign for approval, and asked “how much time did you spend on all this?” Ha! I was prepared for that one. I explained how I had painstakingly spent the better part of the last three months working and preparing. I took great pride the in the financial models I had built over long weekends when I should have been spending time with my kids. That’s how committed I was to this process. And that’s when he hit me with “you know, all models are wrong. Some are helpful, but they’re all wrong.” What…the…hell…just…happened?

His point, he would go on to explain, was that data is very useful, but it isn’t everything. Sometimes you just have to put some numbers and goals out there and see what happens. That’s what he was doing, and their company was dominating the sneaker marketplace. Point taken, I just needed to do it! And so “do it” I did, and I submitted my budget proposal and prepared for a return to the great finance council fire where I would stand and deliver my best laid plans, and the money that went along with them.

Budget meetings of this nature are nothing like the quaint variance reporting meetings where I had first encountered Clan Finance. This was something more akin to combat. When the ramp was lowered, you were expected to run head long into the fire of the budget review committee. This was an enemy force composed of the Chief Financial Officer, the Chief Executive Officer (my boss), and several board members who were the antithesis of my budget buddy. He was there to build me up, they were there to tear me down. They were not your buddy; they were there to strip you of your margins and squeeze every bit of fat you had hidden in your expense lines. But I was ready for the fight. I had my models and data, even the parts that were wrong. I had years of historical figures. I brought nine binders with me. Only one had budgets, the other eight were decoys and props, but no one dared to call my bluff. And most importantly I had my business plan.

The Achilles’ heel of the budget process is the business plan. This is the place where liberal arts majors are given a chance to balance the scales. It is a written word piece designed to explain what it was that you were trying to accomplish with all those models and figures. There are no sums, no margins, no percentages in the business plan, just words. Clan Finance hates the written word. Words are only to be used to explain procedures, not mission driven actions. I channeled Matlock, Perry Masson, and John F. Kennedy as I delivered my impassioned pleas upon the committee. When they make the movie of this moment, I’m certain they will cast Tom Hanks to play my part, it was that good. I reached the crescendo of my closing argument, and then fell into my chair to drink in the ruins of my enemy on the battlefield.

Then I noticed a hand twitch and grab hold of its mighty spear. The great head of Clan Finance, the Chief Financial Officer picked himself off the battlefield, brushed the blood and guts of those around him off his Brooks Brother suit, cleared his throat and said “thank you for your presentation, we will see you at the round two review.” Round two? Nobody told me there would be a second round (not to mention a third). This was it for me! I had thrown everything I had into the battle. He stood there before me unscathed. My business plan had made no mark on his armor. I was visibly shaken. My budget buddy gave me a less than reassuring shrug of his shoulders. Of course he did, this was a child’s playground compared to the place where he “just did it!”

I gathered my prop binders, rolled up my charts, and made sure that my own suit jacket was secured and buttoned up so as to contain my soaking shirt. As I left the fancy room that the board gathered in for its meetings, the Chief followed me out the door. He was a man old enough to be my father’s older brother. He had stood victorious on this battlefield for many moons, but he recognized the shell-shocked budget newcomer and decided to take mercy on my soul.

Before I understood what was happening, his spear hand landed on my shoulder. I thought this would be the moment where he delivered his final blow, gutting my budget and leaving me in financial ruin. Instead, he spoke. His voice was deep, slow and methodic as if each word was being carefully curated by a group of linguistic experts in his mind. He said “son, that was a very moving presentation you just made.” “Son? I’m not your son! Take your hand off me old man, I have to go train for round two of this battle,” is what I wanted to say, but instead I whimpered out a meek “thank you.”  He continued with an unexpected bit of sage wisdom I was not expecting, “what you need to understand is that nonprofit is a tax status, not a diagnosis. What we are doing here is still running a business. Our margins are different, our goals are different, but it’s still a business. Without a margin, you have no mission.”

And just like that he dropped my budgeting corpse on the battlefield. He was of course right. Not just right, but painfully, brilliantly right. This captain of industry who had spent his entire career up to this point in the petrol-chemical industry, pillaging the Earth of its energy resources was now lecturing me on the finer points of being able to execute the mission that I was tasked with delivering. I wanted to hate him. I wanted to tear him down and tell him why he was wrong. But I couldn’t because he wasn’t wrong. The weight of those words sunk deeply into my soul. “Nonprofit is a tax status, not a diagnosis.” Those words just kept playing on repeat in my mind.

Fast forward twenty years and I am now the person in the room uttering these words to table-thumping, mission driven idealists who have not yet left for the private sector. There are so many, too many, nonprofit professionals who fail to learn this lesson. Living hand to mouth is no way for a person to live, and it’s no way for an organization to survive, let alone thrive. Not every nonprofit will have earned income streams like a museum might have, but even philanthropic heavy organizations need to think of their enterprise as a business. We must think strategically, act logically, and execute our missions efficiently. Our bottom line is indeed different than those that “just do it” but without the bottom line, there is no mission.