There continues to be confusion among non-profit organizations about what the term “not-for-profit” really means and how to best conduct the “business of the business.” It definitely does not mean that an organization has a license to go broke! Technically speaking, there are several different categories of non-profit organizations, but the one most commonly referenced is the community-based charitable non-profit, or 501(c)(3). The key word in the 501(c)(3) designation is “charitable.” This simply means that the organization is providing a service to the community that is considered to be worthwhile, within IRS guidelines, and therefore deemed tax-exempt. As I have mentioned many times previously, this exemption is a privilege and must be treated as such.
Also, remember that the organization must first be formed under the laws of whatever state it will operate. In other words, an organization (usually a non-stock corporation) is first incorporated and then it applies for a non-profit designation from the IRS. For the purposes of this article, we are talking about small to medium-sized community-based organizations in the Non-Profit Sector, not churches, hospitals, educational institutions, or government-funded agencies.
I am often asked if it is okay for a non-profit to make a profit. The answer is yes. I am also asked if a non-profit needs to be run like a business. The answer is yes again. But there are distinguishing features between the for-profit sector and the non-profit sector and it is important for the non-profit organization to understand the differences in order to remain in compliance with its IRS designation.
I work with a number of non-profits who are facing real financial difficulty, especially in the last few years, with the recession and the down economy. It is important to distinguish these uncontrollable economic setbacks from the philosophical and policy-driven directions that a non-profit has chosen within the guidelines of its mission. For example, if a rural community-based health clinic is not charging enough in fees to meet its expenses, then it must be subsidized by donations to offset the loss of revenue or, plain and simple, it will go broke. This should not be a difficult concept to grasp: if a non-profit does not have more money than expenses, then it is in financial trouble. Yes, just like a for-profit, a non-profit must cover its expenses. However, any push for a typical non-profit to greatly exceed its costs with revenues is likely to be perceived by its members as going against its charitable mission. Conversely, owners of a for-profit are extremely interested in maximizing their profits.
So, if you ask me if a non-profit should be run like a business, my answer must be yes and no. Yes, there are many basic aspects of the organization that must be run like a business; but, no, there are distinctions within a non-profit that must be viewed differently than a typical for-profit business. Using the rural health clinic example again, if the mission of the clinic is to provide health care to all individuals regardless of their ability to pay the full fees, then its services must be subsidized by other means, such as donations, which is probably exactly what its mission states and probably the key reason it was granted its charitable status by the IRS in the first place.
Over the years, I have consistently urged board members to take their non-profit responsibilities very seriously. However, caution must be exercised if a board begins to find no difference in operating like a for-profit business. This is potentially one of the most difficult facets of a non-profit board to grasp. Not every aspect of a non-profit can be run like a business – and most non-profit board members come from the for-profit sector – so it is understandable for the board member to attempt to apply the business skills they practice every day to the non-profit whom they have agreed to serve.
I do not have any problem with that frame of mind if it can be moderated. In fact, the majority of the “business” practices do, indeed, apply equally to non-profits and for-profits. Things like board responsibility, conflict of interest policy, the need for good record-keeping and proper accounting, adherence to human relations issues, rules, and regulations; the list goes on and on, but the point should be clear. Unfortunately, too many non-profits falter when it comes to running the business of the business. There are three immediate reasons that come to mind as common challenges among all non-profits:
1. Board members often leave the business of raising the funds to operate the non-profit to the executive director and other staff, but the expertise and interest of the executive director lies within the skills of implementing the actual mission of the organization. Fundraising becomes a major frustration.
2. Increasingly, board members do not have adequate time to provide the service that a proactive board requires and fundraising is not enjoyed by very many people, so it does not get done; nor does the board usually push for a business-like approach to running the organization.
3. Executive directors and non-profit staff excel in the mission of the organization and do not typically have strong business skills, nor anyone readily available to assist them. Disagreements on business issues often arise between an “all business” approach and a “not at all business” philosophy among the staff.
Whenever I look into the inner workings of a non-profit that is having trouble with the business of the business, I can almost always determine that the root cause falls into one of these three areas identified above.
Where is the proper balance and how does a non-profit find it? Well, it depends a lot on the non-profit and its mission, but the staff and board need to work together to identify the nuances that best fit its operation in order for the organization to remain viable and sustainable. If agreement cannot be found, executive directors become very frustrated and will ultimately leave the organization. Likewise, hard-to-find board members become less and less engaged. Nobody enjoys volunteering to oversee an organization that is in constant financial challenge.
I recall my very first board meeting at one non-profit. I asked why there was no financial report on the agenda and if I could have a copy of the budget. Honest to goodness, the executive director told me that the organization did not have a budget and actually argued with me that it was not necessary. To make matters worse, the majority of the board members told me they agreed with the executive director! I remember considering getting up and walking out the door right then and there! Seriously. True story. I spent the next several months concerned and frustrated. I forced the board and the staff to act more like a business when, perhaps, I should have spent more time teaching the reasons why change was imperative. Ultimately, the executive director had to be terminated for lack of carrying out board directives, which is always a shame.
Somewhere along the line, an accountant friend on a non-profit board expressed an interesting line of thought to me: “money is good; no money is bad.” We all laughed at his comment but it is amazing how many times over the years I have remembered what he said. Obviously, it is true. If the non-profit has no money, the focus of the staff and board is thrown into crisis mode, the mission of the organization becomes secondary, and every day is a struggle. This is exactly the same for a non-profit as a for-profit, so if the very basics of the enterprise are analyzed, a non-profit is very much a business and it had better be acting like one or it will cease to exist.
To be fair to the naysayers, the nuances of the non-profit must be determined and guided by policy. Back to the example of the rural health clinic, if no subsidy in service fees for certain clients of the clinic were required, then there would be no need for the non-profit charitable status because the organization would be operating as a for-profit and definitely not providing a charitable community service. This distinction is not obtuse and must be clearly understood by the staff and the board.
In summary, every organization in the Non-Profit Sector must follow basic business practices or it will not be able to sustain its operation. And, importantly, every charitable organization must remain true to its mission or it will lose its non-tax designation. These are basic issues for boards and staff to figure out and implement. In the end, it will always be about running the business of the business.