Don’t let the name confuse you: Nonprofits need profits. When nonprofits don’t post the surpluses they need, every day can present a new crisis – pushing back bills, missing paychecks, or going without air conditioning, to name a few. Crises like these jeopardize missions and impact. But crises like these are preventable.
Across sectors and geographies, I have seen organizations creatively meet their surplus needs by being upfront with government agencies and foundations or walking away from a funding opportunity that would have put the organization at risk. All of us in the social sector – nonprofits, foundations, government agencies, investors, etc. – have a role to play in making sure that organizations get what they need to achieve lasting impact. Below are a few ways we can flip the script.
1) Profits Support Mission
A nonprofit’s impact is not measured in dollars. Nonprofits are not motivated by money but by a deep commitment to address entrenched social issues. Because of this, many organizations operate programs that are not fully funded. But when nonprofits do more with less by cutting corners or overworking staff, they feed a mistaken assumption that what they are getting is enough.
To flip this script, nonprofits must connect profits to mission. For example, a homeless shelter could use profits to repair the leaking roof. A community health center could add to their cash reserve, allowing them to continue to pay staff, when government funders are delayed in their payments.
Knowing the full costs of your mission work and owning them unapologetically is a crucial step in articulating the role that surplus dollars play in your organization and its impact. Being specific helps people understand that profits support mission.
2) Breaking Even is Not Enough
Our sector runs on the assumption that break-even is enough, and we have formed stubborn habits around this assumption.
Internally, budgeting conversations, department budgets, and board finance conversations focus on “making budget,” which is usually just the expenses for the year. Even when a surplus is pursued, it tends to be a rigid target, rather than one informed by specific financial needs.
Externally, grant applications, contract negotiations, and indirect cost rates often require tracking down every single cent – and never a surplus. For instance, when your contracts cover 70 cents on the dollar for direct program expenses and less than 45 cents of indirect expenses, it seems absurd to think about anything beyond covering program and indirect expenses. After all, leaders are already stitching together different resources just to get to the full dollar. Counting pennies is a poor substitution to trust and partnership. This system undermines mission and threatens outcomes.
To flip this script, staff and board must discuss money needs beyond what funders are willing to pay and face the gap that’s being left behind by the break-even (or less) approach. It may seem daunting, but what you don’t know can still hurt you. How much longer will you be able to plug the gap? How would being fully funded affect your organization’s ability to achieve impact? Start with your most urgent needs, and speak with those who are most receptive. It will take time. Know that, unfortunately, some will never take you seriously until you say “no” for the sake of the rest of the organization.
It’s time to push back on the break-even-at-best mindset and own that nonprofits need surpluses.
3) Profits Are for a Purpose
Profits have such a bad reputation in our sector that we even call them by another name: “surpluses.” Because profits are, technically, what’s left over after expenses, they are viewed as excess.
Part of the confusion stems from people only seeing the surplus amount and not what organizations would use the dollars for. Nonprofits have real costs that require real cash that might never show up as an expense. A surplus could fix a hole in the roof, proactively address cash flow challenges, or finally replace Windows 98.
To flip this script, nonprofits need to help others understand the purpose of the surplus by identifying what the number at the bottom means through notes, a narrative to accompany the financials, below-the-line budgeting, or conversations.
Change Won't Occur until We Open a Dialogue
Too often, conversations about nonprofit financial health turn into assessing the management team and isolate the numbers from the burdens of rigid guidelines, bias and partiality, sector dynamics, geography, and inequity of access. We dismiss the fact that the numbers are deeply connected to the mission and purpose of the organization.
Let’s not confuse “common practice” with “best practice” and settle with the status quo. Our sector will not change unless everyone speaks up about what a healthy nonprofit sector looks like. This includes the understanding that nonprofits need profits, and profits support mission.
Join the March 14 webinar, Reimagining Financial Viability: The Case for Surpluses, presented by GrantSpace, a Service of Candid, and Nonprofit Finance Fund (NFF) to learn more about how to identify surplus needs and make the case for full-cost funding.
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