“You should run your nonprofit like a business” is common unsolicited advice that often signals a fundamental misunderstanding or ignorance about the nonprofit sector.
Nonprofits are corporations. They have a different tax tax status than for-profit companies and there are no owners or shareholders to receive profits when the budget is in the black. But they are still corporations.
Nonprofits still need to make money.
All companies must be cash positive at the end of the year. Just like a for-profit company that loses money, a nonprofit that loses money eventually goes bankrupt. The difference is that the “profit” doesn’t go into the bank accounts owners or shareholders. It gets reinvested back into the company.
Criticizing a nonprofit for “making money” is actually criticizing it for not investing its capacity to do good work, serve more people, and have a bigger societal benefit. A net positive balance at the end of the year is crucial for building cash reserves, investing in new programs, and managing cash flow.
Nonprofits are like publicly-traded companies.
We have a level of public scrutiny more similar to public company than a private company or partnership. Our corporate tax returns are public documents, so you can see where the money comes from and where it’s spent. Nonprofit CEO salaries are publicly disclosed, just like CEO salaries at Apple and Starbucks. When someone tells me to run my nonprofit like a business, I say “sure thing, and you should publish your own salary on the Internet”.
Most of us are more transparent than the legal minimum. We publish our company’s annual financial audit. Our government contracts are public records. The value of grants we receive are usually published by the foundations that fund us.
We use many of the same financial tools used in the for-profit world.
Smart financial leadership is an important part of being a good steward of donors’ money and ensuring the mission is achieved.We use ratios to gauge financial health. We use short-term lines of credit to manage cash flow — usually to make payroll and rent because our revenue is cyclical like a for-profit business We use to longer term debt to finance capital equipment and real estate — just like for-profit businesses and consumer use debt to make large purchases.
Our employees are professionals
We employ lots of highly skilled employees with advanced degrees. They come from fields like health care, finance, public health, education, business administration, accounting, public administration. Many are managing dozens of people and responsible for P&Ls in the six or seven figures.
They aren’t playing. They are serious people with real careers. In many fields, these professionals are moving throughout the nonprofit, for-profit, government, and academic sectors over the course of a career.
Nonprofits DO pay taxes
Tax exempt status means two things: 1) donations to most nonprofits are tax-deductible for the donor; and 2) companies with a nonprofit tax status are generally exempted from taxes on corporate income, property, and sales.
However, we do pay some taxes. All companies pay payroll taxes. Depending on the location, this can include FICA, unemployment, income, etc. In many states we pay sales tax if we sale things like t-shirts, mugs, etc. Nonprofits pay even more taxes if our fundraising strategy includes generating revenue from business activities not related to our mission. Some nonprofits even own for-profit subsidiaries.
Originally published at ericrogers.org on January 10, 2019.