Myth: There is no Profit in a Not-for-Profit

November 4, 2016

by Paul Steele, Co-Founder of Benefit Capital & TDi

When people think of not-for-profit (NFP) organisations, there’s an assumption that they make no profit. It’s an understandable assumption, given the name, but it’s one of the biggest myths about the sector, and it isn’t true.

Firstly, we need to consider the definition of profit. To put it simply, profit is when there is more money coming into an organisation than going out. Any organisation, no matter what sector it’s in, has to be somewhat profitable to survive. While just breaking even should prevent an organisation from failing immediately, some profit allows them to have a margin and save against future downturns.

Therefore, all NFPs must be profitable if they are to carry out their activities in a long term, sustainable way. The definition of a NFP must then be in how the profit is used, not in whether or not it exists at all.

 

Social Enterprises & Profit

Social enterprises are often placed in the same category as not-for-profits. This means that many of the assumptions and feelings around NFPs are also applied to social enterprises.

This idea appears in beliefs around loans versus investment. It’s considered acceptable for a social enterprise to take on a loan, often with crippling interest and repayments for an early stage enterprise, but not investment. Paying a percentage of the profit towards interest on a loan is acceptable, but paying the same percentage as interest on an investment out of the profits of the business is not. Yet, when funds have come from a partner who has equity in the business, the terms are often much more flexible and manageable for the business, and the funds are being provided by a partner who is willing to take risks with you. This is also partly from a level of unfamiliarity amongst social entrepreneurs with equity as opposed to bank loans, which almost everyone has direct experience with.

Investment fills an important need for mission driven organisations in the current climate. They don’t have the funds available that NFPs did a couple of decades ago to develop infrastructure, when there was less scrutiny of NFP expenditure. Outside investment can provide the capital to build the organisation.

 

What about the rest?

For many early stage social enterprises, there’s pressure on them to begin actively doing good with the profits at a very early stage, when it could be reinvested in the business to develop it. This is often because people believe that the only part of the social enterprise that will do good is the profit.

For most organisations, if they’re making a 10% or more profit, they’re considered quite successful. However, that’s still only 10% of the money they spend each year. While it’s a useful margin, it isn’t the core business of the enterprise. I believe that a social enterprise shouldn’t be defined by what they do with the 10% profit they make, but how they spend the other 90%.

There’s a belief in the not-for-profit sector that organisations shouldn’t generate income, be it through fund raising activities or through grants, above the minimum required to deliver its programs. There is a strong, negative reaction in the community as a whole to NFPs with high administration and overhead costs. People seem to believe that administrative costs and other overheads are not part of program costs, yet without them the programs can’t be delivered.

I believe that mission driven not-for-profits need to be profit driven. Profit spreads the risk for organisations and allows them to innovate. It allows them to risk trying new methods of delivering services and potentially having them fail, without destroying the organisation.

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