Myth about charities: how do they pay their employees if they claim to be non-profit?
As a CEO of local non-profit in Myanmar, I get asked this question often; how do charities pay their employees if they don’t get profit? This is a valid question for a person with no or little interaction with non-profit organizations especially he/she is the one donating. Here’s my simple explanation.
Profit is very different from revenue.
If I have a lemonade stand, I might go out and purchase $5 worth of lemons, and $2 worth of sugar. I mix that with water and make a large pitcher of lemonade.
Let’s say that I sell my lemonade for $1 per cup, and the pitcher holds one gallon, or 16 cups.
If I sell only seven cups of lemonade, my revenue (the total amount that I take in in sales) is $7. But my profit (the total amount of money I made at the end of the day) is $0…because that $7 was what it cost me to get that sale.
Let’s say it’s a hot day and I can quickly sell out my whole pitcher. And the business is booming that I hire my younger brother to help pour the lemonade while I handle the money. For his help, I will pay him $3.
Now, at the end of the day, my revenues (sales) were $16, and my expenses were $10 (lemons, sugar, plus my employee). The difference between the two numbers is my profit—how much money the business made.
Not-for-profit organizations have expenses just like for-profit ones do: they need to pay for their office space, their web sites, their programs…and yes, their employees too. In their case, however most of their revenues (the inbound money they receive) is not earned revenue, but rather contributed revenue from charitable donors.
The rules governing not-for-profits don’t say that the organization can’t pay its employees; instead, they say that the business cannot be owned by anyone and cannot make a profit.
In other words, all the money the organization takes in must go to the charitable purposes of the organization…which includes paying the employees who carry out the organization’s mission.