Not-for-profit vs. Nonprofit

I have been trying to make an effort to use the term “not-for-profit” instead of nonprofit when talking about tax exempt organizations. Many times, we see these two words used interchangeably, but when working with these organizations, I often find that the staff, volunteers, and even the board members believe that their organization should not be saving money and that each year they are required to have a balance of zero.

A not-for-profit is a tax exempt organization whose goal is not to redistribute its “profits” to its owners or shareholders. I want these organizations to reframe their way of thinking of see that their organization’s primary goal is to fulfill its mission. In order to do this, they must be financially sustainable and that means that they must be thinking about the future. Not-for-profit leaders should be looking at ways to make a profit so that they can build up their reserves. By having a sizeable savings account, if their organization runs into trouble, they do not have to be in crisis mode, and can better weather out the storm.

If your organization has a well qualified bookkeeper and/or accountant, this individual can show you how to create your budget to reflect the reserves. I like to recommend that an organization first try and save at least one month’s of operational funds. Then try and save at least three months, and eventually try and get to one year of reserves. The reason why I say one year, is that it would be beneficial for your organization to use the funds raised the previous year for the current year’s operation. During the current year, you can have your development team, raising the philanthropic income for the following year.

Imagine going to your stakeholders and talking about the good work you’re currently doing. Showcasing how your organization is being a good steward of the funds the funds that your donors have invested in you. You don’t have to be in crisis mode, and instead can talk about your plans for the next fiscal year and how their financial support will help you advance the mission of your organization.

At the same time, you will be helping to get society to reframe how they think about the not-for-profit sector. Yes, we are doing good work for society, but that does not mean that we can’t run our organization professionally. We can show them how each year we have a balanced budget and are reinvesting our dollars raised directly to our mission. We can also demonstrate that we don’t need to have a lean administrative budget and to even go as far as to say, by providing our staff with competitive compensation that we are having a lower staff turnover rate, which is helping us to better fulfill our mission.

Since many not-for-profits are scared that their funders will penalize them for having an administrative budget,these organizations are tirelessly working to draft a budget where their programmatic budgets are considerably higher than their administrative budgets. They are continually evaluating if their salaries are lower than the “actual work” that their organization does. This is absurd! We don’t analyze the budgets of for-profit corporations in this way? We understand that if we want to see a profit, that we need to be competitive in compensating our employees so that the work we want to accomplish can be done at a high level.

We, in the not-for-profit sector need to help our funders to understand that every single individual within our organization is helping us to fulfill our mission. For instance, in an early childhood development organization, if we don’t have administrative support, our counselors would have to take time away from helping the kids to make sure the necessary paperwork is completed. Taking them away from directly helping the kids mean that those kids are not able to benefit with more time to grow.

If I want to help make my community better by solving a societal problem, I shouldn’t have to choose between being a volunteer during my limited free time so that I can work full time in the for-profit sector or working in the not-for-profit sector with a clear understanding that I will not be earning as much as they could if they were in the for-profit sector. We should not penalize those individuals called to work in the not-for-profit sectors because by doing so, we are saying that we don’t value the work of the not-for-profit sector and that we don’t believe that they are professional organizations.

So remember, not-for-profits are professional organizations whose primary goal is to fulfill their mission to help better society. This does not mean that they have to operate on a ridiculously lean budget, where they cannot invest in their staff. It also does not mean that they have to be operating at a deficit each year. These organizations can do more good if they work to raise more funds than they need for a fiscal year, and save it for the future.

Is your organization operating as a not-for-profit? Do you take income earned from the current fiscal year, to use for the next? If you’re looking to transition into this model, I can help you map out your course.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: