Your Nonprofit Is a Business

This post is by Jacob Smith, co-author of the The Nimble Nonprofit: An Unconventional Guide to Sustaining and Growing Your Nonprofit.  The book is so awesome that I asked Jacob to post adapted excerpts from it here for you, every Friday for ten weeks.  Tweet at @brightplus3 if you’re loving it!

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Your nonprofit looks and acts like a business. You incorporated with the state, so the secretary of state believes you are a business. You file tax returns, so the IRS believes you are a business. If your nonprofit spends more than it brings in, it will go belly up, which means that it lives and dies on cash flow, just like any other business. Like most private ventures, your success depends on committed proponents and an effective value proposition. In most of the ways that matter, your nonprofit is a business.

Why is it important to point this out? Because many nonprofits labor under the illusion that they aren’t really businesses. Even worse, many nonprofits use the idea that they are fundamentally different as an excuse to do a sloppy, undisciplined, ineffective job of running their nonprofit. You can’t pay your employees competitively? Hogwash. You can’t measure outcomes in a meaningful way? Poppycock. You don’t need to carefully manage your cash flow and your books? Ridiculous. You don’t need to train your senior staff to become be skilled managers? Nonsense.

I discovered how differently organizations can approach spending strategies in the mid-1990s, when I met an Intel engineer whose entire team replaced their computers every twelve months because they had realized that the productivity gains from new technology far outweighed the costs. At the time, I worked for a regional social services nonprofit in Oregon that applied a conventional “use it until it breaks” mindset toward their computers, which meant using old, slow, unstable machines, each of which ran operating systems and software configurations different from the other. My employer never evaluated computer replacement schedules based on cost and productivity in the way that Intel and many other private sector outfits do. As a result, productivity was consistently compromised, and staff wasted time trying to accomplish simple tasks that their computers should have handled with ease.

Other examples are easy to come by: requiring staff to find couches to sleep on even though a crappy night’s sleep will make their time at the conference less productive, directives to purchase the cheapest possible airline ticket even if it includes two stops and a four-hour layover at the Detroit airport (as though the time spent by staff members wasted on air travel has no value), sloppy invoicing procedures that needlessly weaken an organization’s cash flow, failing to evaluate if the cost of a program in time and other resources justifies the mission outcomes, and the like.

You might be able to sustain your nonprofit over time even if you run it poorly. This is true in the private sector, as well: plenty of businesses with weak leadership, weak business plans, or weak execution persist for a very long time. Some even thrive despite these handicaps. As best-selling author and business consultant Jim Collins pointed out in Good to Great and the Social Sectors, both the business world and the nonprofit world run the gamut from the sloppy, useless, not-likely-to-be-around-next-year outfits to the slick, efficient, effective, highly successful operations. But your organization is at greater risk of failure if you run it poorly, and, more importantly, you will not do as much to advance your cause as you could and should.

The key to being great isn’t emulating “the private sector,” but, rather, learning from the best practices across all sectors. (Blindly mimicking “the business world” can be just as hazardous as ignoring it.) But when it comes to successfully running a nonprofit, the differences between the two sectors matter less than you might think. Your nonprofit will measure success by its social impact rather than by the financial return, but your fundamental mission is the same: produce a high value return on the investment made by funders and customers. Some or all of your revenue may come from sources that don’t involve selling a product or service, but, for most nonprofits, the bulk of the income comes from providing value, which might include a tax deduction, a sense of satisfaction for supporting a worthy cause, a splashy magazine, a service of some kind, or access to particular social or professional networks. Your nonprofit gets special tax benefits in exchange for not having owners, but these benefits don’t change the basic laws of business physics: the money coming in must match or exceed the money going out or you’ll close your doors. And the rising interest in social entrepreneurship and businesses that overtly incorporate social change goals into their mission is further blurring the line.

Rather than justify poor business practices and uneven performance on the basis of your nonprofit status, learn from and apply the best practices of all sectors. You’ll survive longer, thrive more fully, and do a better job of advancing your important social mission.

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(photo credit)