Profits in Not for Profit Organizations
Not for Profit organizations have one very powerful advantage over For
Profit companies. That advantage is the mission statement. If you spend
time in a NPO, it is obvious how employees and volunteers dedicate
themselves to the missions and fulfilling the needs of their customers.
Many For Profit companies will have mission statements posted throughout
the organization, inserted in their literature and on the wall behind
the CEO or in the reception area. I have had great fun when leading
seminars by asking people to raise their hands if their company has a
mission statement. When I ask someone from the For Profit sector to
state what their mission is, 9 times out of 10 the response is similar
to “well it sort of goes like this” or “to paraphrase, it is” … The For
Profit companies have missed the power of the mission statement to
inspire, to drive decisions and to create culture.
One huge advantage that the For Profit companies have in spades that the
NPO’s fail to fully understand and implement is the drive to generate
profits. There are many reasons and misperceptions why NPO’s have failed
to generate adequate profitability including:
1. Government contracts which prohibit making money
2. Perception that making money is wrong
3. Misunderstanding that being mission driven is exclusive of being
profitable
4. Lack of management skills to drive profit mentality
5. Lack of Board support to achieve profitability
6. Lack of operational skills to generate profits within programs
7. NPO’s are not allowed to “make” money
8. All money (and profits) should be spent on the customers
Let’s reconsider these items in light of the following:
1. NPO’s are allowed to generate profits based on the Internal Revenue
Code. The concern is that the organization is not functioning just to
make money but to serve a special purpose (i.e. fulfilling their mission
statement).
2. Money comes from only 3 sources: vendors, investors (stakeholders,
contributors) and PROFITS! A rallying cry within the NPO world is “no
margin (profits), no mission”.
3. NPOs need to be great stewards of their resources. This means that
the resources that they are entrusted with should generate additional
resources to continue to serve the mission years into the future.
Remember how Jesus took the loaves and the fish from the young boy. Not
only did he meet the needs of the crowd but they picked up all of the
leftovers. What do you think happened to the leftovers? Yes – resources
used for another day!
4. NPO’s draw employees and Board members that are caring individuals:
not cold hearted “make a buck” type of personalities. Employees must be
trained to understand that profits are good, necessary and the vital
means to continue to fulfill the organization mission.
5. Profits are not evil and should not be spent immediately. NPO’s must
realize that they fulfill the mission with the finances that they have.
The NPO’s will never cure all the woes that they were created for.
Unless the NPO has a stated time of existence that dictates using all
resources, then it is prudent to postpone some monies (profits) for
future services and contingencies.
6. It is true that many government contracts prohibit making money on
the contract. However, it is possible to discuss the establishment of a
reserve (PROFITS), to help support the program in future years. This
becomes an easier proposition to accept if the organization will be
funded by the same grantor for several years. DO NOT accept the
statement as fact that the government will not allow an NPO to make
money. Challenge that concept and find a creative solution that meets
both the grantor and grantee’s needs.
In conclusion, earning profits is not only appropriate; it is the right
thing to do. Any NPO management team or Board of Directors that does not
demand some level of profitability of the organization is doing a
disservice to their customers.
About the author:
Jim Lindell, CPA is the President of Thorsten Consulting Group. He has
worked in Senior Management positions in the NPO industry as well as
consulted with many NPO clients. He is a TEC Chairman and has 2 TEC
Groups in Southern Wisconsin. In addition, Jim is a National
Speaker/Trainer and an author for the AICPA and delivers Keynote
addresses and seminars throughout the country. You can contact Jim by
email at jim@thorstenconsulting.com or 262-392-3166. The company website
is www.thorstenconsulting.com.
James T. Lindell, CPA
Thorsten Consulting Group, Inc.
www.thorstenconsulting.com
34085 Hidden Valley Drive
Dousman, WI 53118
Phone 262-392-3166 Fax 262-392-2199
"Improving People's Lives and Their Businesses"