Raul Larios

PART 2 – Should Nonprofits Strive to be Profitable?

Columbia University 2In Part 1, I talked about the importance of small nonprofits managing their finances as if they were for-profit and using some or all surpluses to build an endowment fund, if they are to survive what appears to be the beginnings of a long-term trend in “under-funding” (100% to mission, 0% to administration).

Profitability, however, is no easy feat if your organization is small (whether you’re a for-profit or a non-profit). I was struck by a recent statistic claiming that of the 28 million for-profits tracked by the Small Business Administration in 2013, only 6 million (21%) were actually profitable. Only 21%!!

As difficult as it is to be profitable if you’re small, many large nonprofits do a phenomenal job at it. Consider my wife’s alma mater Columbia University (CU) here in New York City. CU posted an operating profit of over $230 million in its most recent filing (period ended June 30, 2014) on gross revenues of $3.8 billion. The market value of Columbia’s endowment funds now exceed $9 billion, which generated nearly $350 million in unrestricted income. In keeping with one of its nonprofit missions, CU awarded just over $200 million of non-government University money in financial aid grants to deserving students with great potential, but who were unable to afford the tuition (current needs). And most telling for the purposes of this blog post, CU transferred $17.4 million of its 2014 operating surplus back to its endowment funds (future needs). Way to go Columbia!

Here is a random sampling of other large nonprofits that are highly profitable (as measured by their operating surplus in their most recent filings):

National Resources Defense Council, $17.4 million profit

Environmental Defense Fund, $18.2 million profit

Smile Train, $28.4 million profit

Feeding America, $14.4 million profit

Habitat for Humanity, $15.3 million profit

Smithsonian Institution, $193 million profit

Planned Parenthood, $127.1 million profit

Boy Scouts of America, $37.7 million profit

Clearly, many large nonprofits know how to make a profit, so I’m not worried about them. But I do worry for the hundreds of small nonprofits with wonderful causes that make our communities so much better, yet struggle month to month.

That’s why you should really pay attention to how the large tax-exempts do it. If you dig into their financials, you’ll notice their “for-profit mentality” at work: robust fundraising departments to drive current (and future) revenue; continuous expansion of their endowment funds for future revenue; and an unrelenting focus on cutting expenses wherever possible.

If you are a small struggling nonprofit, perhaps you should emulate the large ones — drop that nonprofit “deficit mentality” and really strive to be profitable.

Good luck, and thank you for making our world a better place!

Advertisements

April 20, 2015 Posted by | New York | , , , , , , , , , , , , , , | 32 Comments

Should nonprofits strive to be profitable? PART 1.

Nonprofit 1 To most people, “nonprofits” imply making the world a better place, but also that charitable organizations should not (or cannot) earn a profit while doing so.

Although the IRS clearly forbids the pursuit of profit as the primary objective of tax-exempt charitable organizations (mission must be primary), surpluses are perfectly okay and are even rewarded with tax exemption. On this basis alone, nonprofits should strive to be profitable. But there’s another, even more compelling reason.

Now I realize that “profitability” as a goal, even if secondary, is a sensitive issue in the culture of many nonprofits (especially small ones), so let me be more tactful: small tax-exempt charitable organizations should manage their finances as if they were for-profit, so that they can carry out their missions in perpetuity. After all, profits are never distributed to shareholders (because there are no shareholders), so all surpluses stay with the nonprofit to be re-allocated as it best sees fit.

I happen to admire nonprofits that are profitable because it tells me that my donation was managed well enough to not only help the current needs of the cause I care about, but also that the surplus from my donation will end up in either operating reserves, a rainy day account or even in an investment fund — all of which will subsidize future needs, turning my donation into a gift that keeps on giving!

I’m especially excited about surpluses that are used to create or expand an investment fund (a.k.a. “board-designated endowments”) that could help subsidize the charitable mission in perpetuity. And this is the compelling reason why “profit” should be every nonprofit’s close secondary objective — especially in light of the disturbing yet growing trend of donors wanting 100% of their contributions to go directly to the mission, and nothing to administrative expenses. Similarly, government agencies routinely award grants that don’t cover the full cost of running programs, which stretches nonprofits to the breaking point.

I call these donors the “under-funders”. They don’t seem to realize (or choose to ignore the fact) that it takes an expensive infrastructure of management, real estate and assets (all administrative in nature) to run any charitable program. Of course, their under-funded donations are gratefully accepted, but the cold hard reality is that you will soon go out of business if you don’t make structural adjustments to this new disturbing trend. My suggestion is that you strive for profits to build an endowment fund, so that you survive what appears to be the beginnings of a long-term trend in under-funding.

See comments and replies to Part 1 below.

Read PART 2 here

April 7, 2015 Posted by | New York | 30 Comments

   

%d bloggers like this: