Non-Profit Organizations Need to Make a Profit?
I come across a lot of people who think non-profits (NPO) don’t need to make money. In fact, it’s called “non-profit” because it’s not supposed to make a profit. Right? Wrong. A NPO needs to make money and even show a “profit”. What is profit? Profit is when revenues/support exceed expenses. We use a different terminology when working with a NPO. The word non-“profit” refers to the purpose of the organization, not to their positive cash flow. We don’t say they make a “profit”. We usually refer to revenue/support over expenses as an increase in net assets. IRS doesn’t even refer to these organizations as non-profits, but as tax exempt entities. NPOs have a different goals. Their purpose is to provide a service to the community. For-profit companies’ purpose is to increase the wealth of their owner/s. In order for a NPO to be successful at providing the service to the community, it needs funds to run their programs. They need to pay employees, rent, insurance, utilities, etc. They need to pay bills just like a for-profit business. They need to operate in the black and manage inflows and outflows like any other successful for-profit business. Actually, managing funds is more difficult for an NPO than a for-profit business. NPO’s receive restricted donations. These funds can only be spent on a specific purpose. NPO’s cannot run on volunteer labor. I’m not saying volunteers are not valuable. In fact, volunteers are extremely valuable and necessary, however, running a NPO is most likely not their career. They need to hire qualified people to manage the organization. Many NPO’s rely heavily on donations. These organizations need to spend money on fundraising efforts in order to receive anticipated donations. Fundraising expenses are often an essential expense for a NPO to be successful. Next time you are reviewing financial statements of a NPO, and you see a “profit”, they are probably successful at accomplishing their mission. Don’t judge too harshly when you see money being spent on management/administration and/or fundraising. These expenses are necessary for NPOs to effectively achieve their mission. By: Cynthia Schoelen, CPA, CFE Partner, Onisko & Scholz, CPAs