Raul Larios

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


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