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Today we are going to take a look at the first myth in a little more depth: that non-profits can't make money. We're going to cover four basic things: where this myth comes from, how it gets expressed, what it does to non-profits and their leaders who believe it, and what is possible when the myth is debunked.
Where does the myth come from?
The myth that non-profits can't make money comes from the basic definition of a corporation-not-for-profit: that no one can personally benefit from their investment in the company. There are no shareholders who receive dividends, nor can the non-profit be sold or dissolved to benefit anyone other than another non-profit (or governmental entity).
So in that sense, of course, non-profits can't make money. No one is to gain personally from the success of the non-profit. By the same token, no one is required to absorb losses from the failure of the non-profit.
The myth comes in when this whole concept gets a bit twisted, as we will see.
How does this myth get expressed?
Some believe that since non-profits aren't supposed to make money, they can never do some basic things that all businesses can do - even charitable or religious organizations.
- Some believe that non-profits cannot retain surplus cash or reserves, or have "money in the bank."
- Some believe that a non-profit should not invest its own funds to make a return in stocks, bonds, real estate, commodities, and so forth.
- Some believe that non-profits cannot charge money for any particular item or service above its cost (this is known as margin), even if other items or services are being delivered below cost.
- Some believe that non-profit employees should not be paid the same rates as employees in a "regular business" for similar work, education, expertise, and experience, since "people aren't supposed to benefit from a non-profit." Others even believe that having to pay salaries at all in a non-profit setting is somehow a waste of resources. But not just salaries - fringe benefits are also often non-standard.
What does the myth do to non-profits?
These beliefs put non-profits at a serious disadvantage to accomplishing their mission:
- No reserve cash means they are always hand-to-mouth, making it more likely that an emergency (or even day-to-day operations) will put the non-profit out of business.
- No investing means that the money the non-profit has that does sit in the bank makes a negative return, since most deposit accounts make less interest than the rate of inflation. (A dollar this year buys 98 cents' worth next year with 2% inflation…)
- No marginal sales means that non-profits cannot engage in activities that have a market value to support activities that do not - thus requiring more donor funds than they otherwise would need. This reduces the size and scope of the mission they can take on.
- Non-profits have trouble recruiting and retaining the top talent they need when the average person has to weigh the cost-benefit of family finances vs. calling/vocation/passion. And in many cases, what ends up happening is that donors with means are calling others to a life of poverty. Of course this is not universal, or even intentional, but happens all too often.
What is possible when the myths are debunked?
- Non-profits can stabilize their cash flow and therefore handle revenue fluctuations and emergencies with aplomb.
- Non-profits can invest in markets that allow a return that creates an additional income stream in the long run. Most non-profits should check in to socially-conscious investing, though, to make sure the companies they benefit from aren't working counter to their mission.
- Non-profits can find products, services and events that make money and leverage dollars that would never be donated but since a service is performed or product sold, the mission capacity grows.
- Non-profits can attract and retain top talent when they pay them comparably to others in their field. Of course, IRS non-profit rules dictate that salaries must be "reasonable", but casting a broad net can help strengthen that case.
None of this changes the basic structure of how a non-profit is to operate: the money just doesn't go back to shareholders, board members, or employees at the end of the year. In all these things, the assumption is that surplus funds are plowed back into the non-profit's overall mission to stabilize, sustain, and grow it so it can bring its vision to reality.
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