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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 email@example.com or 262-392-3166. The company website is www.thorstenconsulting.com.
James T. Lindell, CPA
Thorsten Consulting Group, Inc.
34085 Hidden Valley Drive
Dousman, WI 53118
Phone 262-392-3166 Fax 262-392-2199
"Improving People's Lives and Their Businesses"