Not-For-Profit Doesn’t Mean “Non-Profit”

"It is a fundamental requirement that a NFP organization makes money in order to stay in business."

Many people who want to start not-for-profit organizations set out with a strong sense that they want to provide a set of services to an under-served population. It might be the homeless in a particular city, combat veterans, pregnant girls, at-risk youth, or badly treated animals.

There is more than enough need, and people who identify a population they want to work with often believe that a not-for-profit (NFP) business structure is the best route. Sometimes, they are correct. NFP organizations, because they are dedicated to public service, pay no income taxes, and are typically exempt from state and local sales taxes. There are some other tax implications, and for further insight, you probably want to talk to your accountant.

Unfortunately, many people who want to start a NFP organization, and sometimes those who are running them, misunderstand that the organization is still a business. In order to deliver on its mission, a NFP will incur expenses, and that means that the organization must cover those expenses through revenue.

"Not-for-Profit" does NOT mean "Non-Profit."

A not-for-profit company not only is allowed to make money -- it is a fundamental requirement that a NFP organization makes money in order to stay in business. Like any business, revenue must at the very least equal total expenses. That means that, just like any otherfor-profit business, a NFP has to have an effective revenue model, and must control its expenses.

When expenses exceed revenue for too long, the organization goes bankrupt, and goes out of business. An NFP that goes out of business, by definition, cannot deliver on its mission.

Not-for-profit organizations do not have owners or shareholders in the sense of every other business structure. So "profits" (i.e. excess revenue above expenses) can't be returned to the owners in terms of dividends or increased equity. There are no owners.

NFP managers can elect to do many things with "excess revenue," such as:

  • Deliver more of the same services to its target population.
  • Add service types that remain within its mission.
  • Retain some of the excess revenue against future revenue shortfalls.
  • Bring staff compensation up to normal levels for the job type. (NFPs are notorious for underpaying staff compared to similar jobs in the for-profit space).
  • Expand facilities.
  • Upgrade antiquated hardware and software platforms.
  • Invest in new and productive information technologies.
  • Hire development staff.

The ways in which "excess revenue" can be put to use to enhance the organization's delivery on its mission are endless. But to make that happen, NFP managers have to put the "profit" back into the not-for-profit business.

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