I was at an educational session recently where the topic was nonprofit financing. It was a robust discussion about the use of capital, creation of endowments, financing growth, etc. The primary focus of the speaker was on the area of “growth capital” and the idea that, perhaps, too much of the equity in the nonprofit sector is tied up in facilities and endowments and that there is not enough available to fund the growth of effective, proven organizations.
At some point this discussion turned to a discussion about the philanthropic marketplace and its lack of appetite for providing this type of funding. And then to the issue of what makes up a healthy balance sheet. And it was at this point that, for the first time, I understood the real power of one little word: “for”.
As we discussed what makes an organization fiscally healthy, it was pointed out that many people –including many nonprofit board members – think that nonprofit organizations should not operate with a surplus, or “profit” as we might call it in a business.
The speaker pointed out that the term “nonprofit” is a product of our laziness and was not actually the name or the description intended by the IRS code for the sector. The official term, he pointed out is “not for profit.”
Just semantics you say? I beg to differ.
A “nonprofit” organization would be one that, literally (and perhaps by design), does not operate with a surplus of revenue over expenses.
In fact, there are a lot of businesses (especially since 2008), who, despite being “for profit” taxable entities, are actually operating without profits – so they are “nonprofit”. But, operating without “profit” is not a good and sustainable business model, rather you are a taxable or tax-exempt organization.
But, the term “not for profit” was never intended to indicate that the absence of “profit.”
This term was intended to mean that the people who owned (the board) the organization were not operating it in order to generate profit that would pass through to them. The “owners” are not stockholders and don’t take dividends from the organization. The organization is being operated to generate an outcome other than personal financial enrichment.
That is what “not for profit” was intended to imply – that the organization’s purpose is not to produce a profit for its owners, but it was not intended to mean it would operate in the red.
By truncating that original term, we have, in fact, altered many people’s perception of how these tax-exempt organizations should operate. But, they should not be losing money!
The should be operating with a surplus and should be using that surplus to fund expansion of their programs to further their mission, to fund a healthy operating reserve and facility maintenance reserve, and other sound best practices.
I think it is time we put the “for” back in “nonprofit” and change the perception than an effective not for profit organization is one that is living on the financial margins.
I plan to try to drop “nonprofit” from my vocabulary and use the more accurate not for profit going forward.
I hope that doing so will help change some people’s perceptions of the right financial model. And, maybe they too will come to understand the power of “for”.