Time to kill the “run nonprofits like a business” idiocy

31% of nonprofits run like a business.

44% of nonprofits say they’d like to run like a business, but they don’t know how.

What total BS.

I made those figures up.

Not just for fun, but to prove the point that the numbers are impossible.

Not just meaningless or unhelpful.

Impossible.

They’re impossible because there’s no meaning to the phrase “run like a business”.

There’s no definition.

No criteria exist.

No checklist.

There’s no way of measuring whether a nonprofit – or even a for-profit – is “run like a business”.

So why do we keep hearing this useless phrase?

Aside from passive aggressive criticism, what do people mean when they say it?

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Code for something else

I’ll let off the folks who are really saying: “Nonprofits should be well run”.

I’ll let them off because this sentiment is a big “Duh”.

“No shit, Sherlock.”

Thanks for your insights, Inspector Holmes.

When I hear the phrase inside nonprofit spaces, it’s usually part of a larger conversation about one of three things: decision-making, cost control, or strategy.

They imply that somehow business does it better.

But the facts don’t bear this out. The proportion of US start-ups that fail in the first five years is about the same – 50% (see Small Business Administration and National Center on Charitable Statistics).

Surprising, really, when it’s obvious that for-profits have it easier.

Yeah, I said it.

For-profits are easier than nonprofits.

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Profit motive runs the show

The profit motive gives for-profits an ultimate aim nonprofits lack.

Need to make a decision?

Control cost?

Strategize?

For-profits can set proposed answers to these questions against their effect on the bottom line.

They can reduce their decisions to arithmetic.

I’m not saying they always should or do.

We in nonprofits know decision making can be murkier than we’d like.

But for-profits have a numeric, dollar-driven way out of every conundrum.

Fire up the spreadsheets, stress-test your assumptions, and model your way to profitability.

Or rather, positive cash flow.

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Cash is king

For any organization in any sector, cash is king, and cash flow is the regal current.

Public sector organizations must stay within the annual budget.

Both for-profits and nonprofits need sufficient inward cash flow to cover their outgoings.

For-profits have it easier because they’re able to carry debt through bank loans and overdrafts. Or their models point to “further investment”, which really means “sell a chunk of the company for cash.”

But to suggest that nonprofits should “run like a business” when it comes to cash flow is to say nothing more than “all organizations need to bring in more money than they spend.”

Another Inspector Holmes moment.

What would we do without you?

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Well-run is universal

We know what a well-run organization looks and feels like.

Everyone is swimming in the same direction because there’s strategic and operational clarity.

People know what their jobs are, and they take accountability for their performance.

They can make mistakes, learn from them, and move on.

People trust each other.

They listen to each other, and they have each other’s backs.

Ultimately, this organization, so clearly focused on its clear objectives, meets them.

I’m sure you can add to this list of characteristics.

But nothing here implies sector. These attributes apply equally to for-profits, nonprofits, and public sector organizations.

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Nonprofits have double-vision

We know decision making is more complex than reference to the bottom line and a bit of spreadsheet wizardry.

Clarity makes decisions easier.

Here again, for-profits have things easier than nonprofits.

Why?

It’s not the profit motive.

It’s the double-sidedness.

The what?

Double-sidedness. For-profits sell goods and services in exchange for their revenue. That’s a single-sided organization. They push out goods and services and in return receive money from the people who receive those goods and services. One set of activities represents both what they do and how they get money for it.

Nonprofits are split, or double-sided. They run programs for one community, usually at little or no cost to that community. Then, separately, they fundraise.

Nonprofits always need two sets of activity, one for what they do and another for the money they get for it.

Clarity is easier in for-profits.

Their single-handedness means less noise.

Fewer stakeholders.

Fewer objectives.

Fewer conflicts.

Nonprofits can’t survive on a single activity. They can’t run programs without fundraising. They can’t fundraise (for long) without programs.

Where for-profits can create clarity about their direction and intentions, nonprofits often struggle to balance time and effort between programs and fundraising.

Between community voices and donor preferences.

Between skills-building or tech investment in delivery versus skills-building or tech investment in fundraising or marketing.

I’m not forgiving nonprofits for lack of clarity. But the tension is real in a way that doesn’t arise in for-profits.

As a knock-on effect, lack of clarity usually results in a lack of accountability. When we’re pulled in so many directions, middling progress on any of them is not surprising.

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Can’t we use volunteers?

Another flash point for the full-of-wisdom lament that nonprofits should be run like a business is cost control.

I once heard this view from a Board Member who asked aloud, “If we just keep giving it away, when will it end?”

Thankfully, the Chair not the Executive Director broke the awkward silence when she said, “We’re here to meet need, and we will keep working, and keep fundraising to support that work, until we do.”

Good to know at least one person on the Board understood.

The Board Member did not relent. “I get that, yeah, of course,” he said. “But how do we know we’re giving things away for free as efficiently as possible?”

This is the “if you’re not charging for it, you obviously don’t care about cost” view of nonprofits, sadly presumed by too many with the ability to give.

This time, the ED jumped in to explain how over 80% of the program’s cost was staff salaries, and the rest the bare bones needed to operate.

The Board Member looked shocked. “Why can’t we use volunteers?”

Patiently, the ED noted staff were trained and certified to deliver the program, which was specified in the grant they received.

“Think how much more we could do with volunteers!” the Board Member said.

He convinced himself that he’d hit on a hitherto undiscovered panacea for all nonprofits, even while the ED, again with patience, explained the purpose of the grant, its budget, and the restricted status of the funding (all shared with the Board when submitted).

The penny finally dropped.

This Board Member realized “restricted income” wasn’t just some fancy nonprofit budgeting jargon, but really meant “restricted”.

In his experience in a large company, “cost control” meant one of two things. The difficult version was Six Sigma Black Belts, swarming over every inch of their processes. The easy version was reducing staff costs.

Less staff, fewer benefits.

Most nonprofit programs are labor intensive. Staffing is the bulk of costs. Yet nonprofits have less flexibility here, partly because of restricted funds but also because without premium pay, bonuses, and other incentives, there’s little room to manoeuvre with salaries.

For-profits have much greater flexibility to control costs than nonprofits.

We’ve already noted that well-run organizations manage income to cover expenditures; the cost control issue isn’t sector specific either.

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Nonprofit strategy has no value

What is sector specific is strategy.

Read an organization’s strategic objectives, you’ll know instantly whether it’s for-profit, nonprofit, or public sector.

For-profit strategic plans look to expand market share, enter new markets, develop new channels, and might consider mergers or acquisitions. Their ultimate goal is maximizing shareholder value.

Public sector strategic plans follow a prescribed, overly complicated format sectioned by things like Pillars, Objectives, Success Factors, and Metrics. The ultimate goal is to submit the damn thing by the deadline and forget about it until next year.

Nonprofit strategic plans are a mixed bag. They follow the pattern of the person most in control of the planning process. They might look like a slimmed-down version of a public sector agency, or a fill-in-the-box template downloaded from the web, or they’ll sound super clever and considered because a consultant facilitated.

But they usually miss the point of strategy.

They don’t ask the fundamental strategic question: how do we build value?

For-profits have this down pat. Value (monetized) is why they exist.

In nonprofits, we don’t have standard language around value.

We create strategic plans that sound grand.

They nudge us along toward our vision and mission.

They talk about doing more and doing better.

But they don’t describe, never mind quantify, what counts as value.

Then, once the Board returns from the strategy retreat, patting itself on the back for a job well done, the strategic plan either goes on the shelf or enters the implementation phase, where it unravels at the breakfast table of organizational culture.

I see this happen at nonprofits otherwise described as “well run”.

Poor strategy, and woeful strategic planning, is a sector-wide failing.

But “running like a business” won’t help.

We don’t trade our shares.

We don’t distribute our surpluses.

Our value isn’t primarily financial, nor measured in money terms.

We have value in our programs, staff and volunteers, audience, and influence.

I listed these forms of nonprofit value last time (see previous edition) and I’ll devote an entire blog to it soon.

As a sector, nonprofits deserve better strategies designed to build value.

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Nonprofit start-up is overwhelming

Nowhere is the need for value more acute than at the start-up phase.

For-profit start-ups have clear milestones and a logical method. Get to positive cash flow by shipping the product (or delivering the service) in minimally viable form, get feedback, and continue to sell while improving it.

This method builds all the value start-up for-profits need: cash flow and revenue.

What do nonprofit start-ups do?

Our clearest milestones are forming a Board of Directors, creating a mission statement, filing for nonprofit tax status, and creating a website.

None of that represents value.

Then what?

Then it gets confusing.

Every day I see founders overwhelmed with the myriad must-do’s they’re led to believe they have to accomplish.

Unnecessary stress about things like:

●????business plans (worthless, no audience)

●????five-year strategic plans (nonsense - how about a plan for the next five minutes?)

●????marketing plans (marketing what, exactly, to whom?)

●????budgets and fundraising plans (money for what? Why?)

None of these things represent value, nor help a baby nonprofit create value.

No wonder founders flounder.

They can spend so much time and effort doing things whose value they cannot see.

They can’t connect these documents to their driving passion to serve a community.

They get frustrated.

They wonder if it’s all worth it.

Fortunately, not all of them quit.

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Core business is core value

The core value of a nonprofit is in its programs.

That’s why programming is the “core business”.

I’ve seen coaches advise new nonprofits that they don’t need programs in their first year.

I’m all for preparation. Thorough customer discovery, talking to organizations already working with your target community or on your target problem, and mapping out the impact journey so you can see how your pilot program will … wait for it … create VALUE for the people you serve.

Nonprofit start-ups need to get moving on their programs as early in their existence as possible, if not beforehand.?

They must know how they’re going to create their core value.

Then they can explain that value to others.

Some of those people will show interest.

They’ll have something to market and know their audience.

When they work out how much they need to run their core program, they can budget and raise funds.

They might even have a strategy.

All of it starts with knowing their value.

When I spell this out for founders, they soon find their wings and fly.