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How alike are nonprofits and for-profit businesses?


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 a text from a handout comparing businesses and nonprofits and other nonprofit practicioner thoughts on the business vs. nonprofit debate.

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.

Courtesy of Robert D. Shriner, Ph.D. (rshriner@aol.com) of SHRINER-MIDLAND COMPANY, Management & Economic Consultants in Falls Church, Virginia

 

In response to the handout above:

Tony Poderis, auther of It's a Great Day to Fundraise commented:

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 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.


Added 02/06/2011 by asblackwood, Modified 02/10/2011 by asblackwood

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