Nonprofit Business Model
Excerpted from "Facts & Fallacies", a CAN publication
Nonprofits must meet different standards and outcomes than business — but that does not mean they are less efficient or effective.
Nonprofits are different from business. Their bottom-line, decision-making, operations and structure often do not lend themselves to business standards. But nonprofits are very effective for the kinds of outcomes they must achieve. The efficient for-profit business model is seen as a well-oiled machine that turns out thousands of widgets per day, takes them to market, and makes a profit. In the nonprofit sector, the bottom line can be a wide variety of outcomes that are not necessarily related to business-like values or measurements of profit. Applying business values and methodology to the nonprofit sector might have some benefit to some nonprofits, but it probably does not to most.
Nonprofits often include multiple players in decision-making. In addition to a primary drive to fulfill a mission, nonprofits usually involve multiple players in various decision-making processes — board members, clients, staff, volunteers, government agencies, other non- profits and local businesses. This inclusive "civil society" method runs counter to the business model, in which a single owner or manager is often able to make quick decisions in response to market forces or other factors. Being inclusive certainly can slow the decision-making process, but it does not mean it is inefficient or ineffective.
Nonprofits must often meet "multiple bottom-lines." In addition to paying the bills, keeping financial records and not spending more than they take in, nonprofits must often meet multiple bottom lines. Being collaborative, mobilizing community participation, bringing specific groups into a program, building stable funding and implementing new pro- grams are just some of the outcomes nonprofits often must achieve. Nonprofits must achieve a mission as well as financial outcomes.
Business-like activities are often used to prepare clients for employment, not necessarily to make profits. Finding ways to combine community oversight with appropriate for-profit practices makes sense for some nonprofit activities. For example, museums' gift shops or social entrepreneurial organizations that use business activities to provide work opportunities for clients may need to apply business standards and measurements. However, unlike most for-profit businesses, nonprofits most often engage in business ventures to train and prepare program participants for employment outside of the non-profit.
To keep the client employed, nonprofits also frequently provide expensive, time-intensive services as well — services not usually provided by, or expected of, for-profit companies. As David Barringer, a spokesman for Goodwill Industries International, said in The Chronicle of Philanthropy, "When [for-profit businesses] get someone who requires supportive services to remain employed, the business is usually at a real loss for how to do it because it doesn't make economic sense."
Nonprofits must meet complex reporting standards set by funding sources and government. Nonprofits receiving government grants are constantly monitored and audited and lose contracts if they do not achieve the outcomes identified by the government funding agency. Foundations, too, require regular program and financial reporting, and funding can be withdrawn if nonprofits do not meet the criteria of funders. These financial and accountability measures dictated by government and by funders help to ensure that nonprofit organizations are not wasteful. For example:
• Funders often restrict overhead expenditures, and sometimes no allowance is made for such needs.
• Many organizations conduct independent audits each year to ensure their finances are in order.
• The Internal Revenue Service recently expanded its Tax Exempt division to enforce compliance with nonprofit tax regulations.
• The legal requirements set up for nonprofits' financial compliance are generally much more restrictive than those for commercial enterprises.
Nonprofits must make their tax return available to anyone who asks to see it. Though they are tax-exempt, nonprofit organizations with incomes over $25,000 are required to file tax returns. Regulations went into effect in June 2000 that require nonprofits to make a copy of their last three Form 990 tax returns available to anyone who requests it — meaning that nonprofits are more exposed than ever to public scrutiny and must be more vigilant than ever about their financial information.
Resources are almost always limited, so nonprofits are very skilled at trimming the fat from any activity and adding value for clients by reaching out to other community resources. Most non- profits do not have the level of resources — either personnel or income — they truly need, so they must cut corners on an almost daily basis. Moreover, although the public image might be that nonprofits do not pay adequate attention to financial concerns, in fact nonprofits are usually very good at "trimming the fat" because that is what they must do constantly in order to comply with many funders' low overhead cost requirements and to meet growing demand for their services.
At the same time, nonprofits are increasingly engaging in for-profit activities, and government is beginning to award contracts to for-profit businesses that have traditionally gone to nonprofits. This crossover does justify some "borrowing" of values and standards between historically separate sectors. However, as society continues to pressure nonprofits to be more businesslike, we must continue to question the harms or benefits that might come to the individuals and communities being served when business values are applied to public benefit activities.