“Not for Profit” Is Not “For Profit”

Print Share on LinkedIn More



“Begin with the end in mind.”

The second of Stephen Covey’s famous “7 Habits of Highly Effective People” carries cartloads of implications for anyone planning pretty much anything. Knowing what is ultimately to be achieved guides every decision at every point along the way, and, most importantly, allows clear statements to be made as to whether the work has succeeded or failed, and to what degree. In this sense, an evaluator’s most critical work is done at the beginning of a project, when the end is determined, not at the end.

With this in mind, it should become immediately apparent that a key disparity exists in what we have named these two sectors. On the one hand, intending to exist and work “for profit” is a positive, measureable outcome. The end is profit; that means having greater financial assets at the end of the work than at the beginning. It exists or it doesn’t. On the other hand, intending to exist and work “not for profit” is a negative, saying simply what will not happen, and nothing about what will. The implications of this are significant in a variety of ways, none of which are discussed with any frequency.

We believe we all know what we mean by “profit,” which is the central term here, but I suggest that we don’t, or that the term has not been fully defined for each sector. In a business setting, “profit” means a maximized excess of revenue over expense that is distributed to individual shareholders for their financial benefit. Shareholders demand a financial gain, regardless of the enterprise. They are in it to make money, period. At times, some share of profit is distributed to benefit a community in the form of “charitable giving,” but this is neither required nor adhered to if overall profits decline. And charitable giving is generally done as a method of public relations—convincing customers or clients that the company is “contributing” and is therefore worthy of continued patronage. Otherwise, the shareholder is the primary financial beneficiary, in all cases.

But what is glossed or ignored is that because this definition of “profit” is assumed to be the same as in “not for profit,” the not-for-profit sector has been crippled in attempting to reach the end it has in mind. Because the funds are “charitable,” nonprofits must labor to assure funders and the IRS that no individual is benefiting financially. This burden of proof has led to a perversion of the definition in the nonprofit sector to mean that there can be no excess of revenue over expense at all. “We are not for profit,” says the sector.

The major problem with this, of course, is that no organization can survive, let alone thrive, if there is no excess of revenue over expense to fund operational health and improvements. The notion of maximized profit became conflated to mean any excess revenue, even though whether or how much revenue existed was never the issue in the first place. The issue was whether or not any individual benefitted financially from said revenue – truly, the definition of “profit.”

Which leads to the core of the issue: If a not-for-profit is not “for profit,” then what is it for? Broadly, most people would agree that it is for the social, physical, mental, and quality of life benefits of the community it serves – all things that generally cannot be done at a maximized profit because they cannot be easily or cheaply commoditized and sold. Thus, they are most accurately “for community benefit,” as opposed to “for shareholder benefit.” In this construct, excess of revenue over expense becomes a divergent consideration, not a primary focus. Both sectors now have a clear “end” in mind with which they can begin, and in each case, “excess of revenue over expense” has a completely different application and purpose. For the nonprofit, the excess can be rightly called a “margin” instead of a profit – the funds it needs to operate well as an organization.

So why are the implications so significant? Because virtually nothing about the means to the ends of the two sectors are the same, even though we persist in thinking they are, or continue to view the one as merely the flip side of the other. It is not. In seeking the greatest possible financial benefit for shareholders, a company’s focus is entirely financial. Since profit, as defined above, is the primary goal, all decisions are focused on cash in and cash out. Customers or clients are sources of revenue, labor is a commodity, spending must be minimized.

In the community benefit environment, none of this is true, or shouldn’t be. Customers or clients are generally not the source of revenue; many third parties are—and that fact alone and all its implications on cash flow are enormously significant, forcing constant adjustments and adaptations. But the end in mind here is to improve the lives of people; thus, deep interactions with them are required. Over and over and over again, “best practice” in dealing with people in need has been shown definitively to be based on personal interaction and trust building, guiding people over time. Health, mental health, job training, social service, even arts all now concede that personal contact over time is what works. If profit is the endgame, this is hugely inefficient, costly, human-based work. There is very little “labor” in community benefit work. There is only people interacting with other people. That’s the work. Period.

This raises the interesting challenge of the nonprofit as “investment vehicle” that has taken place over the past several years. Beyond the fact that I am mystified by the concept of seeking market-rate profits from investments in nonprofit organizations, there is the fact that the margins (profits) of a nonprofit should NOT be available for distribution as dividends. I understand fully the thinking behind the creation of “nonprofit investment,” particularly the desire to push the nonprofit toward better business skills and management. I’ve followed the excellent work of the F.B. Heron Foundation closely. But this diversion from mission-related work toward profit-making work is exactly what’s wrong. Managing an organization for a margin (vs. a profit) is certainly a welcome thing, and needs much more attention. But to then treat the margin as a profit and distribute it as dividends to investors is to fundamentally change the core value of the organization and the sector. It is not for profit. Its work needs support, not investment.

Finally, what of the emergence of the “for-benefit” corporation? First, I would say this is the most welcome development in the evolution of capitalism that I have seen in my life. Second, I see this hybrid as branching in two directions. One branch is the for-benefit corporation that is like any other for-profit business (an office supply company, for example) with the exception being a definition of profit modified to mean a “net profit after required social expenses” instead of a “maximized profit.” The for-benefit corporation, in its founding charter, requires itself to assume selected costs that most other for-profits would see as optional at best. These might include environmental maintenance costs, living wages, and the like. These cannot be forgone.

The second branch is the “social enterprise”: the corporation that has direct social benefit as its primary goal, and considers itself to be “mission-driven.” These might include enterprises that focus on recycling, or affordable housing, or renewable energy, or sports-as-therapy programs. In some cases, job-training programs are part of the work, or other community engagement activities. And certainly, these can draw investments from individuals who expect a return. But because of the nature of the enterprise, any investor must recognize that their return will be less than market, since the primary function of the enterprise is not intended to be profit. Forcing such an enterprise to deliver a market rate return completely misunderstands the nature of the investment, and, as with any investment, the investor should have read the prospectus.

There are many ways of doing this work effectively and efficiently, measurably, and well. There are also many ways of doing it badly and wastefully. But using the approaches of the for-profit sector ultimately leads the community benefit sector astray, and cajoles it into thinking that its primary concern should be financial. The financial health of the community benefit sector is of great concern and must be attended to. And if this thinking makes sense, then funders, individual donors, and the IRS must stop thinking that any excess of revenue over expense is “profit,” which is forbidden to the for-benefit sector, and recognize it as the organization’s operating margin. Funders should allow—insist on, even—such revenues to be present, and to be reinvested back into the organization for the benefit of the community. We must all stop thinking that community benefit work (or, now, social enterprise work) is simply a different kind of financial transaction. In the end, working with money and working with people are nothing like the same thing, and we must free the not-for-profit sector from the constraints strapped onto it by imposing an inappropriate system.



Paul T. Hogan is the vice president of the John R. Oishei Foundation.

  • John Gear

    I have taken to telling client nonprofit businesses and people thinking about forming nonprofit businesses that they should

    1) Recognize that they are starting businesses, period; and

    2) Banish the for-profit/nonprofit distinction from their minds, because it leads to many errors such as you describe.

    I settled on the phrase “Fully Retained Earnings Enterprises” (FREE) to describe what I used to call “nonprofit businesses”(which I used to call “nonprofits” before that).

    WIth the rise of entrepreneurial do-gooders forming co-ops and Type B corporations and other venture forms, the line is blurring between what might have been shoved into one or the other boxes in the past.

    I like FREE because it focuses on the one thing that absolutely distinguishes nonprofit businesses from their counterparts — it’s not style, or competence, or savvy, it’s whether or not they’re allowed to distribute earnings to owners. In all other respects, you can have a great business that does a lot of good.

  • Joy Ellsworth

    As an administrator helping a community initiative to start an income-generating, benefit-sharing career center, my planning counterparts have had difficulty wrapping their minds around the inert difficulties of the nonprofit needs-market. They find it difficult to determine which activities could be potentially profit-generating, and which activities are likely to drain the organization’s assets without even “breaking even”—but for a good reason!

    Wringing the last drops of profit potential from the underserved is a new business concept that I have warily kept an eye on since the first whispers of the micro-credit movement’s success. Traditionally nonprofit sector operations prevented the underserved from having to spend their precious funds. The global business community’s recent obsession with taking full advantage of the market at the “bottom of the pyramid” has at least made international business leaders accept lower monetary returns on investment and understand “the triple bottom line” which includes environmental sustainability and social good as acceptable returns on investment.

    In my neck of the woods (the middle of the rural Ozarks), this triple-bottom-line concept is unknown if not vaguely recognized from national media phrase-dropping.

    Thank you, Nonprofit Quarterly, for publishing this contribution. I am forwarding the article to everyone I can in our neck of the woods.

  • Keenan Wellar

    @John It seems to me the key point of the article is that a non-profit and a for-profit are two VERY DIFFERENT types of “businesses” and I agree. I’ve worked in a for-profit start-up, and then started and ultimately stayed on for a long career with a non-profit.

    As Hogan says about for-profit: “virtually nothing about the means to the ends of the two sectors are the same, even though we persist in thinking they are…in seeking the greatest possible financial benefit for shareholders, a company’s focus is entirely financial. Since profit, as defined above, is the primary goal, all decisions are focused on cash in and cash out. Customers or clients are sources of revenue, labor is a commodity, spending must be minimized.”

    That compares to non-profit:

    “In the community benefit environment, none of this is true, or shouldn’t be…the end in mind here is to improve the lives of people; thus, deep interactions with them are required… if profit is the endgame, this is hugely inefficient, costly, human-based work. There is very little “labor” in community benefit work. There is only people interacting with other people. That’s the work. Period.”

    I do know many non-profit organizations that operate as though they are for-profit businesses, and, as Hogan indicates, they are not very good at what they do. Luckily for them, measurement in the charitable sector has been taken so off the rails, few people are paying attention to the outcomes that matter. A charity that has good numbers but is running programs that do little to effect positive change for individuals or the community is simply failing. But such an organization that has a nice-looking balance sheet may well be assumed to be “a good business.”

    The idea that one should banish the non-profit distinction from ones mind in starting or operating one is rather baffling to me. In my organization it would mean we’d stop helping people who really need us, because they are “expensive”….I don’t think that would lead us to good outcomes on behalf of the community we are supposed to be helping.

  • Steve Stanislawski

    Exceptional article! The term “not-for-profit” has bothered me for the decades that I have been employed in the community benefits sector. As of today, I am taking not-for-profit (and nonprofit) out of my vocabulary.

    As the Director of Operations at Journey House Center for Family Education and Youth Athletics in Milwaukee, WI, I am immersed in the “business end ” of the organization. My observation of the community benefits sector is that administrative infrastructure is never expected to meet for-profit standards that lead to operational efficiencies. Funders, board members, community stakeholders and staff have low expectations of what the organization administration can and should deliver. The self-fiulfilling prophecy of underachieving business practices results from the not-for-profit mentality.

  • Keenan Wellar

    @Steve Yes indeed, so much damage was done by the attack on “administrative expenses” in recent years and there have been some great articles about that on NPQ. A non-profit should have results that benefit the community. Saying that should in no way detract from the need for best practices in operations and administration. I was just recently at a meeting of a service club where someone was lauding the benefits of a certain cause because “only 2% goes to administration.” Well, that’s pretty scary. Either they’ve messed around with their categorizations, or they are likely skimping in a dangerous way on the basic necessities of nonprofit management.

  • Chris Dunstan

    My friend Paul is a little hard on for-profit motivations. The hierarchy of concerns in leading companies is 1) safety, 2) quality 3) delivery and, finally, 4) profits.

    Not-for-profits are very much businesses with the key difference is that for-profits seek to ‘net’ 5 cents on each dollar of revenue from which that will target 3 cents to reinvest in the business and target 2 cents for dividends.

    Non-for-profit target a deficit of negative 5 cents on the dollar of service revenue. For sustainability purposes, they need some combination of funds to fund that 5 cent deficit e.g. fund balance draw, endowment fund, donor funding.

    Both for-profits and non-profits struggle every day to sustain a lasting business model as others compete to offer the same product or service at a keener price.

    It is this constant pressure to compete which has raised the West’s standard of living from subsistence for 90% in the 1700s, to today where perhaps 80% of the population of the West enjoys a middle class standard of living and there is a safety net for almost all the rest. The miracle of capitalism is freeing hundreds of 100 million of people from subsistence living, e.g. China.

  • Robin Dunlop

    Superbly written, really highlights some issues I have experienced. From personal experience, the “not for profit” term all too often becomes a cultural impediment within such organisations (at least in Australia where we operate).
    We operate a business model that offers organisations a review of spends, with the objective of helping them increase value (reducing cost) on a results basis. We only get remunerated based on results. Have approached some “not for profits” we hoped to help, at reduced rates, having identified them as organisations we felt attracted to (or should I say we were attracted to the cause).
    The response has varied from disinterest to “we aren’t interested in reducing costs, we focus on getting donations”. Not for Profits are often criticised for the proportion of contributions that make it to the “cause”. Perhaps in many cases, it’s justified!