Nonprofit Mythbusters Myth #1—We’re Not Supposed to Make a Profit
By Judy Chambers
Myth #1—We’re Not Supposed to Make a Profit
People who serve on nonprofit boards of directors often come from the business world, where profit-making is a specific goal of a company. They assume that a nonprofit organization should not make a profit. Sounds right—and it is, if we use a strict definition of “profit” as the excess of revenue over expenditures that provides a financial benefit or reward to the owners and investors in a business. However most of us use a shorthand definition of profit, to mean what’s left in revenues after you meet all your expenses.
So if you’re thinking about profit as a financial reward that benefits business owners, then you’d be correct to say a nonprofit should not make a profit. But thinking of profit simply as the revenue left at the end of the year is a different story. This should actually be a goal for every nonprofit: to start the year with a “fund balance”—money in the bank. This is true not only for nonprofits but for local governments, school districts, religious organizations, and many others as well.
There are several good reasons for a nonprofit to have cash left at the end of the operating year. Let’s look at a few:
Rainy day funds. Most households like to have savings set aside for large, unanticipated expenses like major car repairs. Nonprofits also need to save for large, unanticipated expenses, like repairs to computers, vehicles, or buildings. For example the Covid-19 pandemic created unforeseen expenses such as equipping employees to work remotely, and many nonprofits drew on their savings to cover the costs.
Operating reserves. Having enough funds to pay for ordinary operating costs for a few months just in case is another smart move. Your household might do this to make sure you can pay basic bills even if you lose your job or have an extended illness. Most organizations aim for a large enough reserve to cover two to three months of operating expenses. Why? Some nonprofits rely on regular payments from the state or federal government, foundations, or other funders. When these funds are late coming in, the nonprofit can draw on its operating reserves to cover expenses temporarily.
This is not as far-fetched as you might think: just a few years ago the State of Pennsylvania failed to pass a budget until months after its June 30 deadline, which meant very few funds were dispersed to agencies, local governments, school districts, and nonprofits. State employees and many others worked without pay, and some nonprofits—those without sufficient operating reserves—had to close down temporarily.
Good financial stewardship. When nonprofits apply for grants from foundations, government agencies, and other funders, they are often asked to demonstrate their ability to manage money wisely. Of course they need to show that they have solid accounting practices in place, but just as important is their ability to demonstrate that they are planning for the future and have enough money to cover emergencies. It’s not unusual for a funder to ask for three years of financial documents to demonstrate stability.
Fundraising. Many nonprofits derive a large part of their revenue from donations from people like you and me. We send money to nonprofits who have missions we believe in. We like to fund success. A nonprofit that is facing a funding crisis may send out an emergency appeal for help from its donors, and that may bring in the needed revenue. Once. Donors aren’t likely to continue sending money to an organization that is in crisis repeatedly. Having money in reserve allows a nonprofit to get through a temporary funding crisis without having to ask its regular donors for help, and without the risk of losing those donors as a result.
Making money is not the mission. It’s part of what makes the mission achievable. That mission could be addressing poverty, promoting the arts, helping animals, meeting special needs, preserving the environment—whatever the mission, it takes money to make it happen.
Nonprofits don’t measure their success by the amount of money they bring in. They measure it in terms of impact. How well did we achieve our goals? Are we making a difference? Nonprofits report to the community and to their stakeholders in terms of progress toward their mission. But behind the scenes, nonprofits boards and staff are making sure they have the resources they need for today and for the future. They have a profit—revenue over expenses—at the end of the year.