Nonprofit Doesn't Mean Breakeven

If you work in the nonprofit world, you’ve probably had the experience of someone making a comment similar to, “When you work for a nonprofit, your goal is to not make a profit, right?”  For most people, I politely correct and educate them to the truth.  But, every once in a while, I’m shocked to hear that comment from someone who you would think should know better – like an executive recruiter who is well educated and should be knowledgeable about most major industries (with 10% of Americans working in the nonprofit sector, I would consider that major).  Then…well, you can just picture Elmer Fudd when he gets mad and turns red from his toes to the top of his bald head and it starts boiling over.

The truth is, if a nonprofit isn’t making a significant “profit” every year, it is not going to be operating for long.  When a for-profit company makes a profit, it has three options: 1.) save the money; 2.) invest the money in the growth of the company; or 3.) distribute the money to the owners and investors.  A nonprofit organization can make a profit and and do everything except for number three.  The term “nonprofit” simply means nonprofit to the individuals running and investing (donors) in the organization, not the organization itself.

Unfortunately, our federal government has burdened us with this ambiguous term that misleads many people.  The rest of the world uses the terms “third sector”, “independent sector”, and “nongovernmental organization” (NGO), which are much more clear and don’t leave the impression that the organizations should be poor and not thrive; that they should constantly be struggling to raise money and only breakeven.  I’m not saying that we should try and change the term we use in the U.S. – I just wish Congress had given it a little more thought before they used it!

The occupation of nonprofit management has become much more professionalized over the last 10-15 years – which is a good thing!  Until recent times, nonprofit organizations were mostly run by people motivated solely by the mission with little expertise in business management and often little interest in managing the corporation.  On the flip side you would find retired executives (because who in their right mind would do that much work and take on that much responsibility for that low of a salary – right?;-))  who were constantly being accused of being heartless and only focused on the finances.

What we have to keep in mind is that the legal process of starting a nonprofit is incorporation – not really any different than starting a for-profit company.  Many people are recognizing the need for stronger business practices and that has led to the greater professionalization of nonprofit management with undergraduate, graduate and certificate programs available at many colleges and universities across the world.  The concept of “running a nonprofit like a business” is becoming much more accepted.

So, if we have strong nonprofit leaders and managers that fall in the center of the heart-business continuum, does that mean we will have a successful organization?  Not necessarily.  I would like to proffer that nonprofits have to be run better than a business in order to be successful.

Think about it.  95%-99% of nonprofit revenue is given to nonprofits – not earned.  Often, that money is not given freely without restriction – the organization is told or commits to spending it in a specific manner no matter what the operating situation is (such as the electric about to be cut off).  Nonprofits are involved in what I call the “ultimate sale”  (ask a regular salesperson to try and get money from their customers without giving them anything tangible in return and see how well they do!).  They are dependent on free and below market salary labor.  The people who “buy” nonprofit services are often not the people paying for the service.

That’s hard!  And, CEOs of our biggest companies are finally admitting it publicly.  The financial services and auto industries want to use our tax dollars to keep their businesses from going under, but protest that there is no way they can run a successful company with just a couple of little restrictions like salary levels of the highest paid employees.

Hmmmm…maybe we should ask our retired nonprofit managers to step in and take over AIG and GM?  Not only would the companies be better run, but these executives would likely give a much larger portion of their salary back to charity – even if they were paid only half as much!

So, since we now know that our goal is to do better than breakeven – to actually make a profit – future blog posts will cover concepts, ideas and suggestions on things that can be done to tighten the nonprofit ship.  All aspects of nonprofit management may be touched upon while focusing on increasing ROI, optimizing resources and assets, building efficiencies and increasing awareness.

I hope you enjoy!  Keep following and please pass my blog along to others who may be interested.