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A Common Misconception of Non-Profit's - and its Impact on Sustainability

Type: Publications | Author: Joe Deliso
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 Over the years I’ve had the opportunity to work with many Non-Profit organizations struggling to make ends meet.  And while they all have had their own specific nuances and problems, I often find one common issue contributing to their inability to succeed financially.   

 

This problem is not complex and in fact, easily identified and corrected once understood.  But it goes to the very heart of an organizations culture and for this reason it can be overlooked by the most intelligent and competent community leaders.

 

And why is it easily overlooked?  Because the problem stems from a widely held and deep seated misconception about Not-for-Profit organizations that permeates throughout our culture.

 

What is that?  It’s the perception that Non-Profits aren’t supposed to make one; a profit that is.

Consider this for a moment:

 “A Not-for-Profit” organization is one whose mission contributes to the good of community and thus qualifies to be exempt from taxation;

“A Non-Profit” is simply an organization that spends more than it takes in” 

This might strike you as minor grammatical distinction, but it’s really not.  It’s far more important than grammatical correctness because the distinction strikes to the essential spirit and culture of the Not-for-Profit organization.

 

 Working with struggling Not-for-Profit organizations I often find many solid and well intentioned people actually operating under the assumption they are not supposed to make a profit.  They have come to believe a state of break-even is their real goal and that leads to eliminating all motivation to generate a surplus (profit).  Honestly, I find this all the time and it goes straight to our cultures fundamental bias against the term “profit”.

 

Peter Drucker had a wonderful perspective on profit when he said  “Profitability is not the purpose of, but a limiting factor on, business enterprise and activity   This is a  fundamental truth isn’t it?  While profitability may certainly not be the driving purpose of an organization, a lack of profitability limits what the organization can do or achieve.  This is true for all organizations whether tax-exempt or not.

 

Not-for-Profit simply means it was created “not” for the generation of shareholder profit.  If the organizaiton exists to advance the common good and falls within certain criteria of worthy endeavors our government allows its income be plowed back to the mission.  No taxes.  But nowhere does the tax code specify that the organization is to run without profit.

 

It’s pretty easy to agree that unless you have the ability to print your own money; organizations running at breakeven will be unstable and limited in what they can accomplish.  If you live on the brink you have little choice but to live month to month.

Break even is not a sustainable model for any organization regardless of tax status.

Yet so widespread is this misconception of “Nonprofit” that for many directors and boards, operating at break-even is by definition success.  This becomes a pattern of thinking which leads to behavior perpetuating a  non-sustainable operating model. When the entire organization eliminates profit (surplus) from its thought process, it leads to genuine problems. When the shared belief is that “we don’t make a profit here”, it naturally becomes a self fulfilling reality.

 

I argue that the leadership of any struggling Not-for-Profit will immediately benefit by considering how making an operating "surplus" can fit into their operating culture.

 

I encourage all directors and boards to be sure the term “profit” or if you like “surplus”  is properly understood throughout their organization. Make sure everyone acknowledges that making a profit (surplus) does not diminish the mission of the organization or the wonderful contributions it makes to a community; quite the contrary.   Not-for-Profit organizations which regularly post operating profits are often the most valued and effective community organizations that exist. These are the ones that grow and expand their services year after year. They are able to hire more competent staff which improves their overall service competency and in turn better serves their mission.

 

It’s also true, and often misunderstaood that profitable organizations actually attract larger and more consistent donors.  Sophisticated donors seek out effective operations and are especially partial to those demonstrating ongoing sustainability.

 

Want to know if the role of profit is understood  in the not-for-profit you know?

Start with the annual budget process.  Does the chief executive have a net profit (surplus) expectation built into the operating budget?  If the budget process focuses on break even for more than a year or two, you have a clear sign. 

Talk to board members and ask what net income expectation they have, or what it should be for an organization such as theirs

Interview the key staff and ask them if their activity is contributing profit to the organization. If you get a strange look, you’ll know you’re onto something

 

Conclusion? If you’re Not-for-Profit has been struggling year after year with fiscal stability, look to your culture and check to see if  generating a profit has a place in the organizations priorities. If not, you have identified one key fundamental cause.

 

₁ The Definitive Drucker –Elizabeth Haas Edersheim – McGraw Hill ©2007

 

About the author: 

Joe Deliso is Managing Director of Blackstone Management & Consulting LLC, a Massachusetts based consultancy providing strategic and executive counsel and interim-leadership to both For Profit and Not-for Profit organizations. For more information visit www.blackstonemgnt.com or contact Joe at delisoj@blackstonemgnt.com