Can A Nonprofit Make A Profit?

If I was given a dollar for every time I was asked that question, I would be a very wealthy woman. There is this ongoing fascination within the general public as well as within non-profit organizations themselves with their finances, perhaps understandably so. Let’s explore this issue a little further.

The very word ‘’nonprofit’’ is misleading. Before we get into the details, here is the short version. A nonprofit organization is perfectly entitled to make a profit or have an excess of revenue over expenses, provided that it is applied only to the fulfillment of the mission. It crosses the line only when funding is taken out of the organization and used for personal profit or personal gain.

Of course, it is never that simple. Nonprofit leaders face financial decisions in which they balance the need to maintain a safe reserve fund with not looking as if they have too much funding when they approach donors. There is a perception problem to be overcome that accompanies the question, ‘’Can a nonprofit make a profit?’’

One of the difficulties that we face in our society is that these organizations are judged more on how they spend their money than on how they deliver their services. When I asked a group of women recently about their habits in donating to causes, I was not surprised to hear them go straight to ‘’Can I trust them to use the money I give them wisely?’’ Or even more often, ‘’Don’t they spend too much money on their administration?’’ I did not hear anything about their favorite causes or the good work that they wanted to see done.

At last, there has been shift in recent years by nonprofit watchdogs such as GuideStar and Charity Navigator[1] to give advice to potential donors based on effectiveness rather than a straight financial analysis and yet the perception remains. At the same time, there are still organizations such as Market Watch that congratulate nonprofits with the lowest administration fees.[2]

A second perception problem comes with having a reserve in the bank at all. Overheard in conversations have been comments such as ‘’There are so many people in need. They should be spending the money on taking care of them.’’ These comments are short-sighted and illustrate a lack of understanding of good practice in operating a nonprofit organization. Why would having a good reserve of funds be a good idea?

Instead of asking whether a nonprofit organization can make a profit, we need to switch up our question. ‘’What needs to happen to make a nonprofit organization sustainable over the long term?’’ Even without major events having an impact, the National Center on Charitable Statistics puts the failure rate at 30% of all nonprofit organizations within 10 years of organizing.[3]

While financial reasons are not the only ones given for these failures, a lack of money is certainly on the list. And then what happened when something as devastating as the Covid19 pandemic hit? It is clear that those nonprofits with a healthy reserve withstood this particular storm better than those living from hand to mouth.

And so reserve funding is about stability. It is about longevity. It is about flexibility. The very same principles that keep a for-profit organization viable apply to their counterparts in the nonprofit world. Just as with a new business, many resources are spent at the outset of founding a nonprofit: getting the systems right, marketing the services or the product, hiring the staff and so on. However, it is a sign of a mature organization when it is able to begin to gather reserve funding, in other words, growing a profit.

So, what should a potential donor do when they are faced with an organization seeking financial support, but which clearly has reserves of funds in its bank? Ask questions about the understanding of the organization as to what is the purpose of their reserve fund? Is there a specific purpose for which they are asking the donation? Focus on the outcomes for the funding. What outcomes will the organization be working towards in applying the funding? How will those outcomes be measured?

Photo by Su Nyoto on Unsplash

It is interesting that when we purchase a service from a for-profit business, we don’t ask to look at their books before we buy that service unless we expect to be in a long-term, working relationship with them. Otherwise, we just want to know, is the service any good? Will I get value for my dollar? Perhaps we might look at reviews of previous customers or we have been sent there by a trusted source. We tend to like businesses that have built up a good reputation over a period of time, a tried-and-true service. Those kinds of businesses that have longevity have usually built up a decent profit over time to enable them to be successful. This should be the goal of almost all nonprofit organizations.

I am all for accountability. They are, after all, public organizations that have been granted the special status of being tax-exempt. However, let’s change our question. Yes, nonprofit organizations should make a profit. Instead, we ask, what is the quality of the service being delivered and will this service still exist in 10- and 20-years’ time?

#nonprofits #makingaprofit #sustainability #nonprofitmyths

[1] https://www.charitynavigator.org/donor-basics/giving-101/introduction-to-effective-giving/ [2] https://www.marketwatch.com/story/20-incredible-charities-that-give-99-of-the-money-they-get-to-the-actual-cause-2017-12-28 [3] https://www.501c3.org/top-5-reasons-why-nonprofits-fail/#:~:text=The%20organization%20tasked%20with%20actually,how%20you%20define%20%E2%80%9Cfail%E2%80%9D.