The IRS grants a special income tax exemption to organizations that exist to advance causes of societal benefit and that are not designed to benefit private or individual interests. Obtaining nonprofit status in the U.S. does not mean an organization is good, and it certainly does not mean that for-profit entities are in any way morally inferior to tax-exempt entities. Just the same, this false distinction is commonplace, though often unspoken, and it can foster a sense in non-profit leaders that their organization enjoys some level of superiority or enlightenment over others.
It feels good to know that your work is done to advance the common good, but businesses that earn profits with integrity are not a rare breed (even though scandals that grab headlines can swing popular opinion in this direction episodically). Imagine a world without advances in pharmaceuticals and medical devices. Many of these are high-risk, high-reward industries that have improved and extended the quality of human life in ways unimaginable only a generation ago.
This “us-versus-them” thinking feeds a dangerous series of self-delusions for small nonprofits, most problematically that their focus should be mission first, with profit margin second or even a distant third. Such doctrines erode an organization’s scope of impact and longevity and also have many voices. The most common are:
1) “I’m not a suit, I’m an agent of change”: Board members and staff have a private fear that projections, financials, metrics, etc. are things they could not understand or that these functions lack larger purpose and value.
2) “We’re not in this for the money”: There is an underlying fear that a business-oriented mindset will shift dialogue and culture toward a monetary focus that will eclipse the mission.
There is no way to maximize the number of animals you can save, people you can feed, gallons of clean water you can provide or homeless people you can shelter without thinking about how the organization brings in money. You also cannot retrench your way to prosperity. Budget cuts tend to be short-term remedies.
You can and should avoid waste and reexamine expenditures regularly, but your organization needs both investment and expenditure to breathe and to serve. Moreover, reliance on any one set of donors or grants is always a risky and equally short-term strategy. The absence of strong financial planning usually drives or keeps small nonprofits in what I call an “organizational cycle of poverty.” Elements that are often symptoms of being stuck in this cycle can include:
- Growing lists of deferred maintenance.
- A stagnant, shrinking or absent endowment.
- Governance discussions that focus more than 50 percent of their agendas on small expenditures, lower-level program logistics and routine operations.
- Liquid assets of less than a 90-day operating budget. (This can vary significantly depending on the size and scale of the organization.)
- An administrative head who lacks the authority to make decisions and spend monies within an assigned budget (that is, is micromanaged by a governing body).
- Strategic plans that are nonexistent, or lacking in meaningful financial statements and documented assumptions that should serve as underpinnings for the budget.
Fear and suspicion of language or topics that many consider business parlance often manifest themselves in the kind of control issues listed above. Counter-intuitively, the instinct to protect fails to allow the nonprofit to breathe. Meaningful discussions about new and innovative ways to meet mission and raise the capital necessary to expand services are snuffed out before they can begin. When this happens, the real losers are the wildlife, open spaces, air quality, children and adults who could thrive on the goodwill of those involved.
The first and most important step in strengthening a nonprofit is to come to terms with the fact that an income tax exemption is not a dividing line between giving and taking. Holding on to this belief eventually undermines every other action taken to bring vitality to the organization.
Many pundits speak of a growing corporate mindset in the nonprofit sector — as though there was some gilded age when each stayed in separate corners. They were never separate to begin with.
Prosperity in a nonprofit is not inherently wrong so long as you care just as much about how you make your money as you do how much of it you make (and you operate within IRS guidelines). If you have no money, you are unlikely to achieve your mission. Confront the concerns lurking beneath the surface about business decisions and revitalization efforts will have a better chance of taking root in fertile ground.
John J. Brady is the chief operating officer of HigherNext, Inc. With 20 years in the education sector, he writes on matters of higher education, transitions into college and career, nonprofit management and standardized testing. JB@highernext.com