The Business of Non Profit-Ing: My Why, the Journey and Perspective on Non Profiting
Amy Fass
109 pages, Live Your Dreams Out Loud Publishing, 2022
I wrote The Business of Nonprofit-ing at the start of the pandemic. Shoes That Fit was growing, and we had recently opened a second office, which now sat empty. Schools closed. The whole world seemed to stop, including several of our funding streams. What didn’t stop was the need. Or people wanting to make a difference in the world—especially in the lives of children.
Out of that time came ideas on ways to scale our programs. We pursued new models of operating. We worked on internal projects that had lain dormant—including a logo rebrand funded by a new donor! I had many conversations with supporters about the impact of the pandemic on our organization and found myself face-to-face with many misunderstandings about how nonprofits actually operate and why.
Nonprofits are indeed businesses—but they are not manufacturing a product and looking for a market. We have a service that we are providing, often for the most vulnerable in society, and we are asking a different set of people to fund the work. Our business model is asynchronous. Simply importing a business model into the nonprofit world ignores this important difference.
I believe the nonprofit world is misunderstood. That’s why I decided to write this book, to explain The Business of Nonprofit-ing.—Amy Fass
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Nonprofits play a large and crucial role in our society. There are more than 1.5 million tax-exempt organizations in the United States (National Center for Charitable Statistics), and recent estimates indicate that about 12.3 million people work in the nonprofit sector. That is roughly 10 percent of the nation’s workforce—ahead of manufacturing, transportation, construction, and finance. (Note: these figures are prior to COVID-19, which is continuing to take a toll on the sector, as well as the people it serves.) Nonprofits are a significant part of our economy.
Americans donate more than any other country in the world. Private donations in the United States represent 1.44 percent of the country’s gross domestic product; that is almost twice as high as Canada, which has the second largest percentage base of donations, followed by the United Kingdom, Korea, Singapore, and then Italy. But as a country, the US is unique in the way that nonprofits fit into the broader landscape. As a nation, we have removed government from many “social service” areas, replacing many safety-net service agencies with entities in the private sector. Some of these organizations are for-profit but many more are nonprofit. And while many of these nonprofits work with the financial assistance of government funding, rarely does that assistance foot the entire bill.
There are close to 30 categories of tax-exempt nonprofit organizations defined in the Internal Revenue Code, with the 501(c)3 public benefit charity being by far the largest category. And within the 501(c)3 definition, there are two distinct types of organizations: private foundations and public charities. The latter is what the general population usually thinks of as a “nonprofit” and is the focus of our discussion in this book. Public charities include churches and religious organizations, hospitals and medical research organizations, arts and cultural organizations, higher education and other education organizations, human and social services, environment, animal rights, and other types of organizations to which donors can make a tax-deductible donation. Even with the enormous number of nonprofits big and small across the country, most of us in the nonprofit sector feel enormous pressure because there are so many needs that remain unmet, and we care about the people and causes we are serving.
Thriving nonprofits are based on a passion and an entrepreneurial spirit to make a difference in the world. You have to care deeply and creatively to address many of the problems we face. No matter how specific the mission, each nonprofit is part of a larger ecosystem—each specific mission is part of a larger cause. I believe it is vitally important to understand your unique mission as part of a larger picture, and to stay abreast of that larger field.
For Shoes That Fit, our sphere is the intersection of child poverty and education. Our goal is to remove a basic barrier to children’s success by providing an often overlooked necessity—shoes. We connect people with schools that have high levels of need in their own community. Child poverty is overwhelming. I firmly believe that most people want to make a difference in the world, but they do not know where to start. When you give people an opportunity to make a concrete difference, people light up. Our message is that everyone can make a difference in a child’s life today.
However, there are several myths about nonprofits that can interfere with success. I want to address the two primary misconceptions, which I believe provide the foundation for many misunderstandings about nonprofits, and explain why these they are so disruptive:
Myth #1: Nonprofits should not make a profit.
This myth derives from the misleading name “nonprofit.” The name “nonprofit” (or not-for-profit, as some prefer) emphasizes that these businesses do not pass on any of their earnings to shareholders. In the for-profit world, businesses raise money from shareholders who profit off the business if it succeeds. In the nonprofit world, any “profit” is reinvested back into the organization and the social good that is being produced. The IRS tax code allows donors to take a tax deduction for donations to nonprofits because of the public good they create. In effect, the word “nonprofit” is a reference to a tax status. It certainly is not a business model!
Running a nonprofit IS running a business—but you are running more than just a business. You have a double bottom line. Not only does a nonprofit need to have healthy financials to survive (and to receive funding), it needs to create a SOCIAL BENEFIT to society, as well. It is in effect running two businesses. I would argue that thriving nonprofits are some of the best-run businesses around since they have to thrive in not one, but two arenas. In fact, I would argue that many for-profit businesses could learn a great deal from nonprofits. But that’s another book.
For all these reasons, I generally prefer the term “social enterprise” over nonprofit, since it focuses on the organization's goals as opposed to its tax status. But there are many more pressing battles to confront than changing the sector’s name. I have a meme on my phone that says, “Pick your battles. That’s too many battles—put some back.” I need to read that often.
Myth 2: Having low overhead is a good metric for a nonprofit’s effectiveness.
I understand the well-intentioned desire to see funding go directly to the people being served. But the reality is that you need to have PEOPLE to do the work of the nonprofit, and they have to have computers and phones and supplies to get the work done. For Shoes That Fit, even if the shoes we receive have been donated, we have to have materials for schools to measure the children’s feet, and staff to raise and distribute the shoes, and letterhead to thank donors, etc. I think the focus on overhead is a somewhat lazy way of looking for abuse in the sector, but centering it as a key measure of an organization's effectiveness is short-sighted.
Having every dollar go to the cause does not mean that every dollar is used to purchase a shoe. It reminds me of a cartoon I once saw that showed a group of confused-looking pandas sitting in front of a huge pile of money. The sign next to the money had a full thermometer with a sign saying, “Success! We saved the pandas!” The pandas were eating the money. Money in and of itself cannot save pandas. But people use the money to fuel the work needed to protect an endangered species.
A huge percentage of our budget goes to sourcing shoes—over 94% of all funding goes directly to the program in our audited financials. But much has been written about the “overhead myth” and how dangerous it is for nonprofits, so I would urge you NOT to rely on the “overhead” metric in evaluating the effectiveness of a nonprofit. Look at impact—what does that organization accomplish? Is the mission something you believe in? Is the organization accomplishing it? How many people does it help? What is the impact on their lives? What do families it works with say? What do teachers or other trusted sources report? I have said before that I could increase our numbers of children served by dropping off truckloads of shoes in communities. I could purchase cheap shoes, or used shoes. And that might be useful in other situations. But would that accomplish OUR mission?
Nonprofits are indeed businesses, and to have a lasting and continued social impact, you have to have a sustainable bottom line. A healthy financial picture is what enables thriving nonprofits to do their work. You need to invest in employees, the front-line of your work, and compensate them fairly. As flight attendants say, you have to put on your own mask first if you are going to take care of others. Evaluate a nonprofit on its effectiveness in fulfilling its mission.
The Nonprofit Finance Fund has done wonderful work explaining nonprofit finances and helping nonprofits avoid the “starvation cycle” that ultimately dooms so many good organizations. And it starts with understanding that nonprofits actually run TWO businesses, not one.
In traditional business, the value of a product is assessed by the customer, who decides how much they are willing to spend on the particular item. When a company sets the price for a product, it covers the full cost of providing the product AND profit for the business. When you pay $4.15 for a latte, you are paying for a double shot of espresso, steamed milk, a cup lid and sleeve—this accounts for a little more 20 percent of what you paid. The remainder goes to rent and utilities, labor and profit. The profit margin is either reinvested into business development or goes to stockholders.
Nonprofits do NOT work that way.
For nonprofits, the “customers” we work with cannot pay for our services. So we have to run what NPFF calls a “subsidy” business to cover our costs. Components of a subsidy business can include fundraising, in-kind contributions, investment income, earned income ventures, and “sweat equity” through reliance on volunteers and (much too often) underpaid staff. Because we are not catering to paying customers, we always need third parties to fund social enterprises; “self-sufficiency” is another myth.
To grow an organization’s impact and expand its reach, nonprofits need “profits” so they can invest in their own work, improve their infrastructure, and take calculated risks. You will never grow your organization if you cannot make investments in it. Breaking even is never enough.
But the goal of the nonprofit is what is so different from traditional business. We need to make money in order to grow the organization SO WE CAN CREATE A SOCIAL BENEFIT! No one is profiting off the income; it is ultimately invested into the good of the organization.
A Word on Charity and Government Funding
People equate nonprofits and charities as the same thing. This may or may not be true. Most colleges, for example, are nonprofits; I doubt that most of us who support our alma mater consider our donations “charity.” The key is that nonprofit organizations are designed for the “public benefit.” Public benefit can mean virtually anything—kennel clubs, animal shelters, providing shoes to children, education. You might question how “public” the benefits are, but for a small group of people, that benefit might be particularly important.
A key dividing line in the nonprofit sector is whether the organization receives government funding or not. Government funding is enticing because it can be substantial, but it comes with many requirements and strings attached. In addition, the timing of funding can be unreliable, creating cash flow issues; I have seen reimbursements from the government take up to a year. And funding can vary greatly from year to year, tapering off as administrations and priorities change. The government rarely funds the full costs of programs, requiring the nonprofit to make up the difference; this is commonly referred to as an “unfunded mandate.” Finally, the terms of funding can be onerous, often requiring the addition of staff to track expenses and handle the reporting requirements.
Choosing to forgo government funding allows for greater flexibility in programming and the ability to respond quickly to new needs as they arise. There is enormous room for creativity in the nonprofit sector. Even at its best, the government is bureaucratic and can be admittedly slow to address issues. This is not a political observation, but it rather characterizes how the nonprofit sector fits into the broader picture. The private sphere often allows for more immediacy, effectiveness, and creativity. As an aside, many Shoes That Fit donors love that we do not take money from the government.