The Nonprofit FAQ

How alike are nonprofits and for-profit businesses?
Robert D. Shriner, Ph.D. (rshriner@aol.com) of
SHRINER-MIDLAND COMPANY,
Management & Economic Consultants in
Falls Church, Virginia wrote to NONPROFIT (nonprofit@rain.org) on June 20, 2001, to say:


Running a non-profit is VERY MUCH HARDER than
operating a similar sized for-profit business.

We find that many board members -- especially small business operators --
are unaware of the things that make non-profit organizations more challenging.

We use a hand-out to point out to board members and execs in our training
and consulting sessions the key factors that make non-profits more challenging
to manage from a financial perspective. There are also many other
non-financial challenges that are more difficult for non-profits.

Below is the text of our hand-out.

Non-Profit Finances:

'Just Like a Business'? -- No! It's Harder !!!



While there are many elements of non-profit organizations that are similar
to many businesses, there are important differences that make income-producing
non-profits more complicated than most businesses and most other non-profit
organizations. Here are a few things to consider:

Goals
Business
Get maximum profit with available investment and sales;
owners get profits.

Non-Profit
Deliver maximum service with available donations and sales; any
surplus must be used solely for the non-profit agency's authorized mission.


Decision Criteria
Business
Discontinue activities that don't contribute to profitability

Non-Profit
Discontinue or restructure activities whose costs
exceed available funds from sales, donations, and internal subsidies
No simple "profit" criteria -- different programs can have different criteria,
making choices more difficult to agree on.


Donations and Grants
Business
None. All income can be used as determined by owners.

Non-Profit
Yes, in addition to fee and membership income. And they must
be used as designated by donor.
Adds special accounting requirements not present in business (fund accounting,
special audits for grants and government contracts), plus financial planning
requirements beyond those needed in most other charitable organizations.


Complexity
Business
Small businesses (under $2-5 million in annual sales) rarely
have more than 2-3 'lines of business', and most have only one.

Non-Profit
A typical income-producing non-profit organization has 5 or
more different 'lines of business', ranging from rehab and training to
community outreach to job placement to child care to production and sale of
multiple products and services.


Personnel/Staffing
Business
100% paid staff and contractors.

Non-Profit
Significant share of work in non-profits is done by volunteers
who receive little or no financial compensation and may not be shown on the
financial statements.
Volunteers expect/demand more participation in decision-making, are more likely
to quit if not appreciated properly.


Government Regulations
Business
Must conform to wide range of rules related to labor,
environment, health and safety, etc. Free to enter new business areas if
owners choose to.

Non-Profit
Must conform to same rules as business, plus special rules for
non-profit 'exempt' organizations. In addition, it is generally restricted to
activities that are consistent with its "exempt purpose".
Today non-profit organizations are subject to more government regulation than
most businesses regarding what they can do, how they can do it, and what
information they must provide to the public.


Taxation
Business
Pays FICA, Workmen's compensation, state unemployment insurance
(SUI), and withholding taxes for all employees; pays property taxes and sales
taxes on purchases not resold; pays federal income taxes if it's a "regular"
corporation, but not if it's a partnership, "subchapter S" corporation, or
proprietorship; may also pay state income taxes.

Non-Profit
Same as partnership or "subchapter S" corporation,
except may have state exemption from state or local property, sales, or income
tax. Tax exempt status for non-profit organizations does not mean they pay no
taxes; it means only that they are exempt from Federal income taxes.


Survival
Business
Can't continue to operate if it doesn't take in enough income
to cover all its costs, both direct and indirect.

Non-Profit
Same as business.


What other similarities and differences can you think of?

Tony Poderis commented:

Greetings --- Thanks for the excellent paper which clearly details the
in-common, and not-in-common key characteristics of running a for-profit business
and a non-profit organization. I know that I will refer to your good work many
times

In our non-profit world, spirited discussions abound with some people asserting
that a non-profit organization should be run “like a business.” Others say that
this is not possible because there are things most non-profit organizations simply
cannot do which are second nature and often predictable to businesses seeking to
improve their bottom line. Maybe it is better to say that non-profits should be
run in a "business-like" manner. To some this might seem an exercise in
semantics, while others are unwavering in their particular opinion --- one way or
the other.

You certainly have a compelling and arresting litany of the important differences
that make it much harder --- and often impossible --- for non-profits to produce
earned income as for-profit businesses do. A non-profit organization seeking to
maximize any potential to produce earned income must do so within the confines of
its mission. That last part is very important. Yes, there surely are things most
non-profit organizations simply cannot do which are second nature to businesses
seeking to improve their bottom line.

In my job as the Development Director for the Cleveland Orchestra, when we were
subjected to questions regarding our "profit-making"capabilities, we responded
half-jokingly that we could not increase our “productivity” even if we played a
Beethoven symphony faster than it was played 200 years ago. We could not speed up
our musician "assembly line," nor could we reduce the number of orchestra
violinists required through automation. If the "widget" we produced was symphonic
music, we could not cut costs and make a profit by turning ourselves into a
chamber orchestra and still produce our symphonic-music "widget" which was needed
and desired in the community.

There are similarities, and very close ones to be sure, between running
for-profits and non-profits, but to me the biggest and most telling difference is
in the respective mission statements. --- The mission of commercial business is
to provide something of value and at the best price in the marketplace. --- The
mission of a non-profit organization is to provide something of value in life.
Evaluating the former is easy, but for the latter, such measurements are all but
impossible.

Serving the market, or providing for the public good, will result in vastly
different for-profit and non-profit “bottom-lines” as well. In the former, you
have the shareholders looking to you for greater profits, and in the latter, you
have those whom you serve looking to you for a better quality of life.

In a later discussion (1/5/04), Tony Poderis expanded on these thoughts:

We regularly declare that non-profits can learn a great
deal from successful businesses. And I would hasten to add that the
reverse is true as well.

But we non-profits do have our limits. There are things non-profit
organizations simply cannot do which are second nature to businesses
seeking to improve their bottom line. At the Cleveland Orchestra,
when we were subjected to questions regarding our profit-making
capabilities, we responded half-jokingly that we could not increase
our productivity even if we played a Beethoven symphony faster than it
was played 200 years ago. We could not speed up our assembly line,
nor could we reduce the number of violinists required through
automation. If the "widget" we produced was symphonic music, we could
not cut costs by turning ourselves into a chamber orchestra and still
produce our symphonic-music "widget."

On the other hand, we did need to demonstrate constantly improving
efficiency in other areas of our operations. For a non-profit, being
perceived as a lean, mean fighting machine is critical to optimizing
the results of a fund-raising campaign. But budget cuts must not come
at the expense of maintaining and improving service to the community
and program quality. A non-profit that cuts back on the quality of
its services will diminish its fund-raising appeal.

As you in effect said, and according to Webster, "Marketing is all
business activity involved in the moving of goods from the producer to
the consumer." This for-profit definition can be meant to relate as
well to the "delivery" by non-profits of food, therapy, medicine,
education, cultural events, etc. to constituencies.

A problem does come about regarding the measurement of the
effectiveness and quality of those two very different "deliveries."
The new television set's picture is sharp and true to color, a
consumer can declare with measured certainty. But we can never
measure the sheer happiness --- expressed as in no other way --- when
a severely physically challenged person finds new life in his or her
body when placed astride a horse by volunteers of therapeutic riding
organization.

At the end of the day, a General Electric shareholder wants a profit
on his or her investment of capital, and a GE customer wants a quality
product at a good price.

At the end of the day, a donor to a shelter for abused children wants
assurance that his or her money is helping a worthy organization to
fulfill its mission, and the abused children want to be in a place
where they are cared for and loved.

"What's in it for me" is a reality for all four of the constituent
parties described above, but their motivations to be the supporters
and the "consumers" are vastly different. And I believe they must be
"marketed" in different ways.

To attract customers, you sell them on the value they will receive
from the products or services they purchase. To attract donors, you
communicate the value they can bring to the quality of life of others
and to themselves for the money they give to worthy causes.


And Kasey Minnis,
Director of Operations,
Multiple Sclerosis Foundation, added further thoughts:



To my mind the most significant difference is in the area of marketing. A
person purchasing a "widget" will, for the most part, recognize his or her
need for such an item before it is marketed. You know if you need a car, a
vacuum cleaner, a health insurance policy. The purpose of for-profit
marketing is to influence the person to purchase one company's widget over
their competitors'.

For a nonprofit organization, the challenge of marketing involves convincing
your audience of the need for your organization, of the basic reasons for
your existence.

Some types of organizations are ingrained in the public consciousness. Who
at sometime has not given to a cancer or diabetes organization? Or to the
March of Dimes? It is not merely the prevalent need for these organizations
that makes them popular causes, but like a for-profit enterprise, people are
already aware of the need. They know they need a vacuum cleaner; they know
we need a cure for cancer, even if they have not been personally touched by
the tragic consequences of the disease.

But what about Arts organizations, social service organizations,
organizations for rare or misunderstood diseases? For us, the goal, is to
"market" the need for our services. Very often, those services may have no
direct benefit for the people we look to for support. How do you convince
someone they need to support a cause that is not presently affecting their
own lives? Therein lies the challenge.




Posted 6/29/01 -- PB