Almost everyone in the not-for-profit industry uses the term nonprofit. What is the difference? The preferred term, not-for-profit, emphasizes that the organization has been formed for a purpose that is other than making a profit for its owners or shareholders. As a matter of fact, not-for-profit organizations do not have owners or shareholders – they exist to serve the communities in which they operate. The way they serve these communities is known as their charitable mission and that is the reason they were formed, not for profit purposes.

The term nonprofit has the connotation that these organizations should operate without having a surplus of revenue over expenses at the end of the year. They should finish with no-profit. Unfortunately, many believe this is true and this is harmful to the not-for-profit world and the communities they serve.

Being financially successful is essential to just about every nonprofit just as it is to any business. Building an operational surplus allows you to do even more for the community you serve with less stress and enables your organization to undertake new activities to accomplish your mission.

Many believe that a not-for-profit organization would be considered financially strong if it held unrestricted, liquid reserves equal to approximately 35% to 40% of a normal year’s operational expenses. Thus, an organization with a $1 million budget should strive to accumulate reserves of approximately $350,000 to $400,000.

The Better Business Bureau Wise Giving Alliance, a charity watchdog group, in their standards for charitable accountability indicate that organizations should avoid accumulating funds that are more than three times the size of the past year’s expenses. This would mean that the organization with the $1 million budget should not accumulate more than $3 million in reserves. As you can see, there is a wide range between what many consider to be a financially comfortable level of accumulated “profits” and what the watchdog group considers excessive.

Each time I speak to boards, I encourage them to realize that they are a business with a purpose that is not-for-profit but that they have a normal business obligation to operate at a surplus rather than a break-even or deficit and that accumulating a reserve from operating at a surplus consistently over a period of time is an essential and worthy goal. I encourage all of you to incorporate this concept into your organizational planning.

As one of the largest CPA firms in Boston, KLR is unique because they service over 220 not-for-profit organizations with compliance and consulting services. We have extensive experience helping Nonprofit organizations regarding boards, and board responsibilities, charitable contributions, taxes and 990 filing requirements.