I’ve written about how nonprofits can use advice written for businesses (with just a little translation). When it comes to nonprofit finance, however, some business wisdom is just wrong.
Clara Miller, the former director of the Nonprofit Finance Fund, explains why. In her wonderful article, “The Looking-Glass World of Nonprofit Money,” she lists seven assumptions that businesspeople make that–in the nonprofit world–are just not true.
A Nonprofit Differs from a Business Because…
- “The consumer buys the product.” False. Donors and funders buy the “product” (which may be a service, a program, or a campaign), and clients benefit from it.
- “Price covers cost and eventually produces profits, or the business folds.” False. Nonprofits are devoted to their missions and will keep on pursuing the mission as long as they can. They have a sideline in fundraising to support their “business”–but it may also sap energy away from the reason they exist.
- “Cash is liquid.” False. Government and foundation grants are often restricted to specific purposes and can’t be used to pay for anything else. A nonprofit can get more grants and have less money to pay its day-to-day costs of doing business!
- “Price is determined by producers’ supply and consumers’ ability and willingness to pay.” False. Since the consumers don’t pay (see #1), they don’t have the say. Government or foundation funders decide what they’re willing to pay AND how many clients the nonprofit must serve in return for the money. If it’s not enough, the nonprofit has to make up the difference with fundraising, or the quality of service suffers.
- “Any profits will drop to the bottom line and are then available for enlarging or improving the business.” False. Many nonprofits have spent less than budgeted only to see their budget reduced for the next year, on the theory that they must not really have needed the money.
- “Investment in infrastructure during growth is necessary for efficiency and profitability.” False. Well, actually, true, but not recognized by funders! Many funders want to pay for program, but only a far-sighted few will invest in building capacity for the future.
- “Overhead is a regular cost of doing business, and varies with business type and stage of development.” False. As Miller says, “Overhead is seen as a distraction—an indication that an organization is not putting enough of its attention and resources into program.” (Thankfully, this is beginning to change, but only beginning.)
The Donor Solution
When Miller talks about “funders,” basically she means government and foundations. The great hope for nonprofits is the individual donor.
When we persuade people who care about a cause to express their values by donating to our organization, we get out of the looking-glass world and back into the real world. People who pull out their credit card or their checkbook to make a gift care about the impact their gift is making.
They don’t care whether you have money left at the end of the year. They don’t care about whether an expenditure is “program,” “fundraising,” or “overhead” (within reason). What matters to donors is whether your organization is a good way for them to make a difference. Communicating with your donors? That’s your business.