Financial Fuzziness in Charitable Funding

It’s interesting that we have come to define charitable benefit organizations as “not-for-profit”.  “Non” profit doesn’t clearly identify the nature of social benefit organizations.  It only states one characteristic that isn’t true.   Actually, it simply hints at the fact that “non-profits” usually don’t generate too much profit, or that it isn’t their primary goal, or that the profit generated is to be used for a particular purpose.  Since charitable organizations have grown beyond simply being different than business enterprise in regard to their source of income, it may be more accurate and helpful to define community benefit programs with a term other than “non-for-profit”.

One fallout from being labeled as “nonprofit” includes a set of assumptions about “for profit” business that by implication, must not be true about “nonprofit” organizations.  We may assume that business endeavors are productive, innovative, driven, highly complex efficient organizations.  Thus “nonprofit” organizations may be considered unaccountable, dealing in activity that can’t be measured or evaluated.  The “bottom line” that makes this simple for business doesn’t seem to fit or isn’t given the same regard in nonprofits.

Businesses have customers who must be served and satisfied for success. Nonprofits have clients who may or may not be helped.  Competition is a primary motive in business.  Nonprofits operate from concern and caring.  Nonprofits receive donations.  For profits charge fees. Not-for-profit organizations have dreams while goals and objectives are required for responsible commercial operations.  Business requires measurable results and growth within a limited time in order to survive.  Nonprofits may continue trying various approaches and programs with good intentions and social theory.  These and other assumptions naturally arise by defining charitable groups as “not” or the opposite of for-profit business organizations.

As many nonprofits have matured in purpose and productivity, using multiple revenue streams and talented executives in administrative positions, the line between “for profit” and “not-for-profit” has become blurred.  Corporations are becoming more socially and environmentally responsible.  Whether for profit or reasons of conscience, businesses are giving attention to bottom lines that include people, community and the planet as well as profits.  As the cost of caring rises, donations and government funding dwindle, nonprofits are seeking more ways to generate income.  Without the same requirements of a corporate board and stockholders, nonprofits may be more flexible in financial matters while retaining their tax exempt status and continuing to collect financing from various sources.

Until rules and regulations catch up with the growing common ground between profit and nonprofit organizations, there may be lack of clarity as charitable nonprofit organizations operate social business enterprises and subsidiaries.  Self monitoring along with public transparency is needed for members and donors to maintain trust in charitable causes.  Investors with an interest in community welfare and sustainability look for financial profit as well as social ROI.  New rules will eventually be created to deal with profitable practices of nonprofits and charitable work of for-profits.  Transforming practices and stereotypes can begin now.

See related research from Stanford, Wharton Business School and University of Minnesota professors describing for-profit and not-for-profit stereotypes.

Don’t Just DONATE to what you believe in. INVEST in it.

With rising costs for charitable work and a decline in giving during difficult economic times, every dollar you dedicate to doing good needs to produce the greatest SSROI (Social/Spiritual Return on Investment).  Evaluating the work and efficiency of any nonprofit endeavor is important to knowing your effort makes the greatest difference.

Every donation, whether a one time or regular gift, is gone once spent in promoting your mission.  This creates the need for continual fundraising efforts to maintain ongoing work.   New donors are needed as inflation, growth in outreach and attrition of donors demand more dollars.  The perpetual work of fundraising keeps donors involved and informed, but also uses valuable staff and volunteer time to keep programs moving forward.

Some investments in your organization’s work can provide repeated returns for a single effort. This is the purpose of contributing to an endowment fund.  With low interest rates and a need for cash flow to maintain the mission, endowment funds require a large balance and produce a small return.  Investments in an endowment fund cannot be spent and are always at risk.

The nature of a social business enterprise is to create ongoing income and growth in financial resources over time.  Just as any profitable business increases in value and provides income for owners, employees and shareholders, a cause based social enterprise can grow and provide ongoing income when successful.  This residual income reduces the need for repeated fundraising events and campaigns.

When considering a social business enterprise to produce residual support for your organization, the social and spiritual return on investment must be evaluated in light of the original investment of time and money.  Running a typical business requires managing products, people or property, providing services, keeping records and customer service or startup costs.  A large investment is generally counter productive regardless of income generated for your cause since the time, money and risk associated with it distracts from the focus on your mission.

Every organization, however, has one valuable asset that can be invested for the common good.  It is less obvious than their financial resources, but may be worth even more to your mission. The social connections you share with each other and others outside the group create an affinity network of trust and communication.  In today’s marketplace, this social network is highly valued by corporations willing to pay for the opportunity to introduce their own business to your members.

Never place the integrity and relationships of your organization at risk of being harmed by commercial interests by corporations that operate according to typical marketing methods of deception, guilt, shame, greed, fear, enticement and pressure to “buy” your members loyalty.  These forces are so common in marketing efforts, we have come to accept them as normal and may be blind to the harm they can do to a community with a shared commitment to a common cause.

Invest your social capital carefully and wisely.  Don’t put your most valuable asset at risk of being lost or weakened.  Measure the potential social/spiritual return on investment in terms of the good that may be accomplished, care for relationships in your community, and financial support to accomplish your goals.

With careful planning, you can safely invest your social capital through voluntary participation in a low key marketing enterprise that generates significant support for your mission without risk to relationships, reputation, or the cause you serve.  The right social business enterprise can even strengthen relationships in your group through collaborating for the common good and connect you with new people in your community.