Nonprofits Are Still in Business

“’Nonprofit’ is just a tax designation. Like their for-profit counterparts, they are still businesses.”?

That was the comment by one of the panelists at last week’s “Nonprofit Board Summit,” held by the HBS Alumni Club. It struck me as relevant since this point is often downplayed (if not overlooked entirely) by some in nonprofit leadership.

Of course, nonprofits are different than for-profits. Most significantly, nonprofits work with a different perspective on success; their key metrics do not typically focus on profitability and shareholder value.?

?Even so,?nonprofits need to operate with a business mindset if they hope to fulfill their respective philanthropic missions.?In particular, this comes down to paying close attention to four areas that are sometimes given short shrift.

#1. Revenues Matter

“Nonprofit” doesn’t mean “nonrevenue.”?Indeed, as some leaders in the field have pointed out, “no money, no mission.” Because while revenue for its own sake may not be the goal, maintaining revenue above operating costs is imperative so that the organization can achieve its objectives.

One benefit that nonprofits have in this regard is that?they often rely on a two-pronged approach:?First, they can raise revenues through “fee for service” offerings — ticket sales or subscriptions for performing arts organizations; tuition for educational organizations; product sales revenues for museum retail operations. Second, they may receive revenue through donations.

However, nonprofits do face a unique challenge: they need to generate enough revenue to keep the wheels turning, but… they also know that to the extent they sell goods or services, keeping prices low will allow them to serve more constituents.

This tradeoff is often the cause of much internal concern.?For example, in working with a museum retail shop, I helped the operators get more comfortable with the idea that a high gross margin on items sold is not a bad thing as it serves to support other elements of the museum’s operations. Many nonprofit retail shops even make a point of highlighting this fact to their patrons.

?All that to say that money, whatever the source, is critical to nonprofit success.?It needs to be treated as an essential operational element and, as with any for-profit venture, be both forecasted and carefully tracked.

#2. Not Everything is Worth Doing

In the for-profit world, products, services, even entire business units that no longer generate enough of a return, are eventually — sometimes abruptly — shut down. There are often many factors considered, but profitability is nearly always at the top of the list.?

Nonprofits, by contrast,?often find it difficult to choose programs or eliminate those that have outlived their effectiveness, “so long as we help somebody, even if only a little.” Many years ago, for example, I worked with a music venue that was eager to bring music programs to middle schoolers. Based on the funding for the program, they were able to provide just one semester’s worth of experience to a single middle school class (in the entire city!), but they were still reluctant to shut it down.

Here, since profitability doesn’t serve as the organization’s north star in deciding what to keep and what to eliminate,?its stated mission can be helpful in trimming (or avoiding entirely) those things that detract from its primary purpose.?“Doing good” is too broad a strategy to be useful in this regard.

Note as well that running too many programs can cause a nonprofit to be spread too thin, resulting in it having little impact in any of its programs.

#3. Human Resources Needs to be Taken Seriously

Nonprofits often possess another key advantage relative to their for-profit competitors:?free labor in the form of volunteers.

This can work well and to everybody’s benefit. For example, for many years, my parents served as unpaid ushers for several local theatre groups in exchange for a chance to see the performances at no charge.

However, just because some of the workforce is made up of volunteers,?it’s important that these organizations resist the temptation to accept a lower standard from their workers?(the same should be said for unpaid Board members). As a former president of the New England Aquarium once told me, while the aquarium is dependent on a contingent of volunteers for its operations, they will fire them if they don’t perform!

Free or not,?volunteers represent the organization and need to be held as accountable as anyone else would.

#4. Competition is Everywhere

Nonprofits don’t operate in a vacuum —?their “customers” have choices from other organizations, nonprofit and for-profit alike.?So, while many patrons buy (at least in part) for the “cause,” others are simply weighing the cost/benefit against other options, as they do when making any other purchase.

The “Urban Nutcracker,” a dance group that puts a modern, multiethnic spin on the ballet of the same name and in which my daughter participated when she was younger, understands this all too well. They recognize that they are competing not just with other nonprofit arts organizations, but with movies, TV, and other live holiday shows.

Reflections

Many of the nonprofit organizations I work with are extremely sophisticated and fully understand that they are operating a business as well as working towards a mission.?The best of them are both resourceful and entrepreneurial in their thinking, as they often set out to accomplish significant things with limited, and at times less predictable, sources of funding.?

For those that are not yet at this level, it’s important to remember that while they may operate with a different kind of purpose than their for-profit brethren,?at the end of the day, they are still businesses and need to employ the tools and mindset that reflect this.

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