Nonprofit doesn’t mean no profit
By Michele Roth
Someone recently commented to me how they didn’t want to donate to a charity event because the organization had a paid staff. Being from the nonprofit industry, I wanted to know more about why they felt this way. The answer: the organization was a nonprofit, meaning nobody should be paid (at least that’s the way they always understood it). Honestly, I was stunned. Are we still battling this misconception?
One of the main differences (aside from tax-exempt status) between for-profit and nonprofit organizations is purpose. A for-profit’s purpose is to make money and distribute any income exceeding expenses (profits) to individuals or shareholders. A nonprofit organization’s purpose is also to make money, but income is used to further a cause and provide a public benefit. Funds are either put back into the services it provides, a foundation, other nonprofit organizations or into program-related investments.
So, why do people like the one I mentioned feel that nonprofits shouldn’t recruit, hire and compensate talented individuals or “make money”? As Dan Pallotta mentioned in his TED Talk, “The Way We Think About Charity Is Dead Wrong,” it might be due to the things we’ve been taught about giving, charity and the nonprofit sector.
First, let’s talk about operating costs—also known as overhead—that includes utilities, rent, office equipment, supplies, etc. These are essential to running any business. So are staff members. Current challenges faced by nonprofits, quite honestly, mirror the for-profit world. They’ve been the same for several years: standing out in a competitive industry, establishing goals, reporting results with complete transparency, building a solid infrastructure, overcoming skepticism and continuing to grow all within a limited budget. This takes expertise. Let’s face it—most of us have been a part of that volunteer-only group. There is a place for this, but not when raising thousands or even millions of dollars for your community while adhering to the checklist above. Bottom line—qualified management and oversight and proper staffing can dramatically increase both effectiveness and outcome. This holds true for both nonprofit and for-profit business organizations.
Secondly, let’s look at marketing. Another point of Pallotta’s is, the for-profit sector is known and accepted to “spend, spend, spend on advertising,” but when it comes to nonprofits, most don’t want to see any donation dollars go to marketing efforts, only to “the needy.” He then challenges us by stating, “as if the money invested in advertising could not bring in dramatically greater sums of money to serve the needy.”
Every nonprofit needs to be a marketing organization. Are we OK with learning about the organization’s mission and goals and how we can help through donating or volunteering? Do we feel good when we hear a testimonial about a kid’s success through a program or service? Do we love hearing that our donations helped to feed struggling families or provided heath care for a veteran? Of course we do. Compassion is a human instinct. All of these examples are marketing.
Another form of marketing is fundraising events. More and more, nonprofits are leveraging their for-profit partners’ marketing teams. These marketing budgets can help support a fundraising event through sponsorship; offsetting venue costs, hiring a guest speaker, décor, food, entertainment and other event-related costs. Marketing dollars are not charitable contributions; they are meant for marketing and must be used that way, therefore do not take away from charitable giving. Next time you hear about or attend a nonprofit organization’s fundraising event, don’t immediately assume that donor dollars are funding it.
Lastly, I want to mention alternative revenue streams. Typically, we see nonprofits raising money through annual or capital campaigns, grants, donor support, foundations, endowment funds, planned giving and events. It’s a challenge to raise enough to meet the needs and manage day-to-day operations, so many nonprofits are looking to other sources to generate income. We’re beginning to see more of what’s known as an L3C, or low-profit LLC, which must have a nonprofit purpose, but may generate income. For years, we’ve seen similar models from organizations like Goodwill (retail store) and Girls Scouts (cookie sales) and more recently from Columbia Industries. We would never criticize a for-profit company for making money. Why would we not support an effort that is mission driven and socially beneficial?
I encourage you to watch Pallotta’s TED Talk and to go to overheadmyth.com. Both (from 2013, by the way) are highly relevant and insightful.
Imagine if the focus on our nonprofits could shift from just low overhead to high performance and research. Without adapting and investing in finding a permanent solution, we’ll never end the fight against hunger, homelessness, cancer, illiteracy, domestic violence… the list goes on and on. After all, isn’t that what nonprofits are here for?
Michele Roth is the owner of Michele Roth Creative Services, providing marketing and fundraising consulting and support for small businesses and nonprofits. She lives in the Tri-Cities and has worked in the nonprofit sector for 15 years in development, fundraising, communications and program management.