• alexrmontgomery

Are Nonprofits Businesses? No. And yes.

Been thinking a lot lately about this pervasive idea that nonprofits could learn so much from for-profits. Are nonprofits businesses? And if they are, should they try to act like for-profits?

Here are five ways nonprofits are like businesses, but also we shouldn't treat them exactly the same.

1. Nonprofits have customers, but maybe not who you think. The goal of for-profits is easy, profit. So customers are those who pay. Easy peasy. At nonprofits, the 'customers' are those the nonprofit is trying to help. Confusingly, funders and donors are critical to the business of running a nonprofit, but they are not the customers. For this nonprofit business model to work, the goals of the funders must align with the goals of the nonprofit, so that both agree on the customer. At its best, funders and nonprofits collaborate to drive impact. At its worst, funders become the customers, and the goal of the nonprofit becomes muddied and progress towards goals slow.

2. Nonprofits Need Overhead, just like For-Profits. Overhead, or administrative costs, have long been considered an unsavory expense for nonprofits. Defined as expenses that don't go "directly" to serve the mission of the organization, they've been seen as pulling money away from the intended impact. But just like for-profits, many nonprofits must pay for office space, computers and equipment, not to mention the staff who write grants and other required administrative tasks to run an organization. Fortunately the trend is shifting to a better understanding of necessary overhead and how acknowledging its importance can help nonprofits thrive.

3. Employee retention is important everywhere. I'm always shocked when someone asks me, "but nonprofits don't have any... profit, so how can anyone get paid?" Like businesses, most nonprofits have paid employees. And like most businesses, keeping good employees is a priority. For nonprofits, the paid work of staff is part of driving whatever impact the organization aims to have, so it follows that if those productive employees leave, there will be less impact. Instead time will have to be spent finding new good employees, and time will be lost trying to make a difference.

While salaries at nonprofits may be able to rival for-profits, other employee benefits and supportive organizational culture are critical to employee retention, and ultimately societal impact.

4. Salary levels are just as important to nonprofit professionals. Obviously related to employee retention is the importance of salary. Nonprofits may have different financial constraints, but recognizing comparable salaries in the industry as well as experience level are important in determining salary levels. While nonprofit professionals are driven to make a social impact, they also work in a competitive field so ensuring competitive salaries is just as important as in for-profit businesses.

5. The importance of money and sound financial management. In for-profits, the importance of bringing in money and spending time managing finances is obvious. For many nonprofits, however, the idea of budgets and financial management is a detraction from the impact a nonprofit is striving to make.

For nonprofits, the focus on managing money is not to make profit, but to direct funds in ways that will drive impact in line with the nonprofit's mission. With a firm handle on how much revenue is coming in and where it is being spent, recognizing savings and re-deploying them to other areas that can drive change is key.

In conclusion, nonprofits are like for-profits in many ways, but the key is in the way they differ. Putting a for-profit lens on how to run a nonprofit will lead to distortion that will likely not improve impact - and that is the goal of every nonprofit.

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