Profit vs. Growth: Why So Many Community Benefit Organizations Struggle
Aug 24th, 2009 by David Svet
There isn’t any one reason that so many community benefit organizations struggle to make ends meet, but there is one reason that I see most frequently. It has to do with the balance or imbalance of profit and growth within the business. What’s that you say? Profit? Business? Aren’t we talking about community benefit organizations — the nonprofit sector? Yes.
Many of you, working in either sector, will be surprised to learn that the word nonprofit is a misnomer. Businesses with tax-exempt status via IRS code 501(c)(3) are, in fact, businesses and do earn profits. The profits are usually called a surplus and are reinvested in the business as opposed to being distributed to employees or shareholders. Because these organizations are in the primary business of providing community benefit and reinvest their profits in the goals of the business they can be tax-exempt. But they have to earn a profit to survive, just like all businesses. All of the general business rules apply; profit and loss, supply and demand, etc. But the one most overlooked is between the competing tensions of growth and profitability.
Growth and profitability pull in opposite directions. Growth eats resources and must be funded. Profit is the surplus that is left over from taking in more money than it costs to provide a service. Every business needs to balance growth and profitability. Unbridled growth can sap cash and reserves leading to catastrophe — zero or negative profit. Unbridled profit is usually unsustainable and results in a stagnant organization and a lack of innovation — or zero growth.
Community benefit organizations face the toughest decision in the world trying to keep these opposing forces in balance. They need to limit service. They need to say no to the beaten woman, turn away the stray dog, or decide that the remainder of the children will go hungry, or worse. They face decisions that no CEO in commercial business dreams of facing. The result is very often an imbalance toward growth at the sake of profitability. It’s just too hard to say no.
Another way to look at it is sacrificing the future to fill an immediate need. Demand exceeds the supply of service. More money is needed to provide more service, so all resources are directed to easing the demand. The result is usually less or no marketing leading to lower fundraising and a slow but steady death spiral as demand overwhelms the organization. The better choice is the hardest one — limit growth while concentrating significant resources on marketing, fundraising, and maintaining a profit.
In the organizations that I see struggling, this is considered heresy — the cause comes first. Every penny must be spent on the cause. I believe that you need to save yourself, remain strong, and live to fight the good fight. Strength comes from strength, not weakness. Balancing growth and profitability will enable strong, long-term growth and create the opportunity to eventually achieve victory. You may now grab your torch and pitchfork to join the angry mob forming in my front yard while I address your comments.
Good points. We, as nonprofits, definitely struggle with growing the cause versus shoring up the organization. Another way we struggle is focusing solely on our individual cause and organization; we don’t look outside our box to the larger issue (be it child welfare, poverty, homelessness, etc).
In order to be most effective and achieve the social change the nonprofit was set up for, we need to look for ways to create a lasting impact. While donors want to give so you can take in one more dog or have one more empty bed for a homeless man on a cold KS night, creating a lasting impact in the community will reap more benefits and results. One way to do this is advocacy. Nonprofits should engage in both direct service and advocacy - providing service helps meet those immediate needs and advocacy helps reform the larger system. Otherwise I fear we will constantly be struggling with spending money on the immediate need (one more dog) or reinvesting in the organization.
Well said, Jenn. Thank you for your insight. You make a great point that advocacy is needed to advance the reforms of the larger system.
Now if we can convince donors and directors to concentrate on the long term solution instead of immediate results we might have better organizations making a greater impact.
David
Dave:
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Thanks for this. For us, your observations are Reason #427 why this sector needs to stop using the term “nonprofit!” (Thanks for doing such a good job of that here!
A quick story to illustrate your point - this one falls into the “I couldn’t make this stuff up” category.
At the end of their fiscal year, a small arts group had funds left over in their account. The board voted to donate every penny of those funds to another organization, because they thought a “NonProfit” wasn’t allowed to have funds left over.
Hildy
Hildy,
WOW! I’m not sure what to say about your story. How in the world can an entire board end up in that situation without anyone checking with a financial professional? How do you have a board without a financial professional who would know the answer and stop the craziness? That is the most amazing thing I’ve heard in a very long time.
Thank you for all your help and encouragement!
David
“The board voted to donate every penny of those funds to another organization, because they thought a “NonProfit” wasn’t allowed to have funds left over.” = Board Fail