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

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.

Flexible and responsive coaching is key to sustaining women’s economic empowerment during a crisis

While each business owner faces their own set of challenges in response to the uncertainty and upheaval of COVID-19, we are observing a series of consistent coaching requirements emerge.

When life gives you lemons… pivot your business model

Nemika Brunton is based in Alotau, Papua New Guinea.  We met her during the YuMi Tourism Partners Pilot program.  The program addressed starting small, testing and learning, and how to adapt and respond to market needs.  These lessons have certainly helped Nemika shift her business focus in response to COVID-19. Tourism is a key industry for the town and many of the local businesses were tourism based.  So, the impact of COVID-19 hit the town hard.  Many locals – including Nemika – have adapted quickly to totally new businesses and customers.

Supporting Social Enterprise during COVID-19

Following a tumultuous year of bushfires, COVID-19 and recent floods in Southern NSW, lots of small businesses and the families and communities they serve, are doing it tough.  One way we’ve seen people showing their support for these local businesses is through the #shoplocal #shopvictoria and #buyfromthebush movements.  We’ve been inspired by this and wanted to share a #shopsocialenterprise guide based on some of the businesses we’ve been working with over the last 18 months.

Resilience, at what cost?

Over the past six months we as a team have navigated our own business and helped hundreds of others to do the same. We went from having a clear business model and ready to write our best year ever to having nothing as certain and many parts of our own business model under threat.

Finding motivation to continue business during COVID-19

As the current economic climate evolves with COVID-19, we have been sharing some perspective from both our own work and the continual conversations and support we’re offering others. Initially, we shared a metaphor about what this first felt like – like our house was...

Pivoting during COVID: responses from Fiji

Recently, we caught up with Deb Sadranu at Essence of Fiji to see how things are going for her, her business, and Fiji in the face of COVID-19.  Tourism is a key industry for Fiji, and Essence of Fiji usually serves the tourists. As a result of COVID-19, Deb’s whole business model has pivoted from predominantly local, in-store sales, to predominantly international, online sales.

A letter to my daughter about Black Lives Matter and racial inequality

Dear Willow,  I’m writing to you because I want to share some rumblings in my gut that have troubled me.  You are at an age now, where it is time for you to step into a conversation that for us as Australians is long overdue. I have tried to teach you about love,...

Why mindset matters to women’s entrepreneurship and why we should invest in it, especially now

At The Difference Incubator (TDi) we’ve been supporting social entrepreneurs to start and grow their businesses for over a decade. In 2019 we partnered with PNG Women’s Business Resource Centre and Kate Wilson from Kamaji Tree Consulting and Coaching, with the support...

Customer Empathy Interviewing

When was the last time you asked your customers what they thought? We use Customer Empathy Interviews to help businesses deeply understand their customers and design competitive products and services. It’s also been one of our top coaching tips for business owners...

Pivoting your business model during a crisis

A conversation with Geert from FarmWallGeert Hendrix founded FarmWall in 2016. Farmwall is an agrifood-tech startup that designs urban farming technology and experiences to enhance fresh produce accessibility in the city. In our constantly developing world, the need...