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Can a Nonprofit Organization Have Too Much Profit?

April 19, 2012

Operating at a surplus is not excessive, it’s necessary.

This is a question that I am asked almost on a monthly basis. I think that part of the reason why this question pops up so frequently is that leaders of nonprofit organizations have not yet grasped the difference between thinking about their organization as a nonprofit vs. thinking about it as a not-for-profit organization. I go into detail about this topic in my February 21, 2012 blog post titled “Nonprofit vs. Not-for-Profit”.

Not-for-profit organizations are allowed to operate at a surplus – having more revenue than expenses. This sure beats the alternative – operating at a loss. Operating at a break-even is almost impossible unless you operate like some government agencies and spend money wildly near the end of the year.

Being financially successful is the dream of just about every not-for-profit. An operational surplus allows you to do even more with less stress and equips your organization to undertake new activities to accomplish your mission. It is also important to realize that all surpluses have to be invested back into the organization – they cannot go into the pockets of staff or board members.

Can there be too much profit? Yes, if your operational surplus is very high, you may be asked why you have not devoted more resources into your mission. The reason may be that the surplus arose late in the year and there was insufficient time to effectively increase spending in mission related areas. Remember my golden rule of publicizing operating results – anticipate what a critic might question and prepare your response in advance. If you don’t think you have a good reason why you were so profitable in your most recent fiscal year, address the issue by talking about how these profits are going to be used in the coming year.

Annual profitable results should be your goal and consistently achieving your goals is the road to success. Our communities need successful not-for-profit organizations much more than they need organizations operating by the seat of their pants, constantly distracted by worries about where the next dollar is going to come from.

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.

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