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3 Reasons Why the Best Nonprofits are also Profitable

April 29, 2013

Consistent surpluses are an indicator of financial stability. 3 reasons why a profitable nonprofit is a healthy one.

This week I was reading one of the many nonprofit news and blog items that flow into my mail box. One that caught my eye was from Peter Kramer of the Nonprofit Finance Fund titled Top Indicators of Nonprofit Financial Health. Peter’s thesis was that there is an explosion in the amount of data available these days and all of this data presents a challenge to nonprofit leaders to tell a clear and compelling financial story. So he isolated 6 financial metrics that one might focus on in evaluating the financial condition of a not-for-profit organization.

One that struck me was called Consistent Surpluses. I have touched on this subject in a couple of past blogs: Nonprofit vs. Not-for-Profit and Can a Nonprofit Organization Have Too Much Profit? . In my blogs, I advocated profitability as an annual goal and, therefore, was pleased to see Mr. Kramer call for consistent surpluses as an indicator of financial stability. Kramer points out that “nonprofit is the basis for the tax-exempt status but is certainly is not an operational objective”. The reason why I advocate using the phrase “not-for-profit” instead of “nonprofit” is because not-for-profit helps to emphasize that the business model for the organization is one of servicing the mission and the organization does not exist with a purpose of profit maximization. The organization should not exist with a purpose of no profit.

3 reasons why the best tax exempt organizations must also profitable:

  1. Consistent surpluses are a direct result of strong financial management and control.
  2. Consistent surpluses not only point to strong financial management and control but also lead to the accumulation of cash reserves.
  3. Accumulated surpluses or financial reserves allow for breathing room necessary for when things don’t go according to plan or when funds are needed to address mission critical opportunities in a timely manner.

So, while I have advocated for budgeted surpluses and written to assure you that there is no such thing as too much profit in a not-for-profit organization, I hope that the call for consistent surpluses by another nonprofit writer will help to convince you that your not-for-profit organization is a business. Losing money or even breaking even is not a desirable condition. Annually, on average, less than 40% of the not-for-profits report a surplus. This does not bode well for the nonprofit sector and those who depend on it for their safety net.

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