Recently I was asked if there is a difference between operating a nonprofit organization and a for-profit business. I answered with a resounding YES and the following brief overview.
While the aim of for-profit organizations is to maximize profits and forward these profits to their company, the nonprofit organizations’ aim is to provide funding to meet society’s needs.
Nonprofits spend a major portion of their time seeking funding, often without selling a “product”. They need to convince contributors of the value of their mission and how they can spend the contributed money wisely as they move forward meeting the mission of their organization. Additionally they must prove the need to use some of the donated money for administrative costs.
A reality is that nonprofit organizations are often in a struggle to find enough money to survive and to raise funds more effectively.
Unlike for-profit companies that can earn commissions for sales, nonprofits must constantly demonstrate that they use the greater part of their funding for their mission. The Association of Fundraising Professionals (AFP) asserts that a commission on each donation would undermine donor trust by placing self-gain over a nonprofit’s mission.
An interesting fact: According to journalist Tom Chmielewski, The American Institute of Philanthropy suggests that a not-for-profit organization’s unrestricted net assets should total less than three years of its current budget, and that at least 60 percent of its total expenses should be spent on program services rather than on administration and fundraising.
Another interesting fact is that In addition to a balance sheet, a for-profit will prepare an income statement each quarter listing the company’s revenues, gains, expenses and losses. On the other hand, generally speaking, nonprofit organizations do not compile an income statement but instead prepare a statement of activities each quarter. This document simply lists the organization’s revenues minus expenses, plus net assets
To learn more about the differences in the for- profit businesses and nonprofit organizations spend some time on the internet. There is a wealth of information there for interested persons.
Author: Robin Noah, Executive Coaches of Orange County, www.ECofOC.org