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.

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Fundraising as Sacred Exchange

People who give money to a cause expect a return.  Something good will get done.  Something important will happen because I gave.  At first glance, it seems like the basic contract. But look at the fine print.  Much more is being exchanged that just money for a good deed.

Different currencies change hands in a single donation.  In addition providing a charitable service, a wise donor will require trustworthiness and competence from an organization. There may also be an expectation that respect or social status will be delivered along with a tax-deductible receipt.

Corporate donors may expect added business or customer referrals and endorsement of their product to be part of the exchange. A photo opportunity to enhance the company’s image or recognition in the nonprofit newsletter may also be part of the deal.  Rarely explicit, these added benefits are often part of an unspoken agreement.

Charitable organizations may also ask for more than just money.  There may be a need for technical assistance or intellectual capital in the form of demographic information and research.  A nonprofit group may also benefit from association with a trusted corporation that is known to give only to worthy organizations, encouraging others to give as well.  The expectation that a gift will continue to be supplied in coming years is sometimes only acknowledged when it is not renewed.

It is the trust and good will involved that makes an exchange between charities and donors sacred.  Will strings be attached or hidden agendas be promoted? Is a promise conditional? In the language of Adam Grant (Give and Take: A Revolutionary Approach to Success), is each party a giver, taker or matcher?

With lines blurring between for profit and not for profit organizations, desired outcomes and resources may be shared by donors and charities. Communication networks, workspace and equipment, legal or marketing expertise may be used by both.  Until existing laws are updated and contracts are clarified, mutual respect and trust is needed to insure fairness and efficiency in the work we do together…

Unless the sacred trust of partnership produces a better relationship and outcome than measured transactions.  Maybe the positive regard, confidence and readiness to give more on both sides is able to create a good that goes beyond our best strategic plans.

When something beyond what is approved by our lawyers and accountants is born, a life greater than our own may come to be. A new creativity and collaboration may lead us into a sacred future we aren’t able to imagine when our giving is limited to a safe 50% that requires personal benefit before giving more.

Associational Funding

Responsible corporations are funding good work around the world, but especially in local communities where they do business.  Giving to organizations with members that do business with you just makes good sense for any company.  It is a good way to say “thank you” to customers and a good way to attract new customers.  The connection with a social network of any group and positive reputation through the network can build brand loyalty and satisfy the desire for companies that are doing well to also do good.

Even when members of an organization don’t have the resources to add a great deal to the financial bottom line of a company, the connection still contributes to social benefit goals of the company. If their work is known and appreciated in the larger community, this builds good will with citizens aware of the funding provided.  Many grant foundations now require nonprofit organizations to collaborate with each other to make services more efficient.  This ties small organizations with larger ones and groups serving different neighborhoods together.

If a group of 20-30 people can help a corporation achieve its community involvement goals, an organization of 300 members may be given priority in receiving funds from a concerned corporate sponsor.  Now imagine an association of 100 nonprofit organizations with an average membership of 50-100 members each.  Corporations are willing to grant larger gifts as a partner with the association. Gifts directed toward an association of organizations also hold greater promise of social return due to the cooperation of groups to coordinate efforts and avoid duplication.

Assuming social ties are meaningful in an association of nonprofits, the company benefits more from a larger network of groups.  When the association includes customers of the company, there is even more incentive to support the missions represented by groups in the association. Social networks are valuable to any marketing plan.  Greater trust within the network increases its value as a resource for word of mouth marketing.

The time has come for community benefit organizations to band together and recognize the value of their extended network of combined membership.  This multimillion dollar asset can be used to fund every good cause represented in the association. Social connections are to be treated as sacred. The best intentions of those who have gathered to do good can be supported from profits earned in the neighborhoods where they live.

Many word of mouth marketing systems have been established by different corporations to build their customer base.  Few marketing systems have been designed to nurture the social capital of neighborhoods and communities providing customers. With careful attention to community values and relationships, an association of groups can be created that is held together by mutual benefit and shared financial support.

Develop a cooperative association in your community that will help each group serve the community better and increase the amount of funding available.  Structures now exist for an association to direct corporate funding without the need to write a grant, pass legislation or request donations. Let’s learn to use the invisible assets already existing among us.

Creating Real Jobs from Invisible Assets

We primarily depend on the government or business to create jobs so we can earn a living to provide housing, transportation, medical care, education, entertainment and all that is needed for ourselves and those we love.  We give away our money in taxes and hours of our life in working with the hope that government or business will provide for our needs.   We may give up our freedom and neglect our families to serve government and business in return for the wages and benefits they promise.

Sometimes this system works.  As it does, business tends to become greedy and rewards those at the top with a salary and bonus for top executives that may be 400-500 times the salary of the average worker.  When government grows, it creates a larger bureaucracy with red tape and waste that dampens the spirit of enterprise and personal responsibility necessary to economic health.

When the system isn’t working, corporations and the banks that support them become fearful and hoard resources needed to create jobs.   For their own survival, costs are cut back and jobs are lost. In lean times of great need, governments become overextended in attempting to care for citizens.  Raising taxes and using credit hurts the very people government is attempting to rescue.

When we depend on corporations, we become consumers, addicted to the things we can buy.  We fall into the trap of believing we need just a little more, the new improved product, or something it seems everyone else has.  We build stuff so we can buy stuff, locked into the system as consumers.  What we consume becomes our goal in life and what we own becomes our identity.

When we depend on government, we become clients.   Over time we come to expect and take for granted the assistance that is offered.  We learn to manage the system in order to receive what we need.   A battle arises in negotiating our rights and benefits with those who make decisions about how government programs are administered.

The group of people that refuse to depend on corporations or government are entrepreneurs. They may seek the blessing or assistance of both government and business, but they depend more on their own effort to create what is needed for economic survival in this world.  Few are able to take this route because it requires creativity, great determination, resistance against failure, a worthy product or service and an initial investment to get started.

Entrepreneurs take risks without the safety net of corporations or government to back them up.  They tend to be fiercely independent and sometimes rough in their pioneer spirit. They are often willing to do “whatever it takes” to succeed and may lose friends or family in the process.  Although figures vary, one conservative study showed that 34% of business start ups fail during the first 2 years and by the end of 4 years, 56% have failed.  Of those remaining, some are still at a break even point.

Is there is a safer way to invest and build on our social relationships collectively rather than independently?  Can we cooperate in a way that creates a livelihood for those who are connected for the common good?  With a believe in abundance, there is enough profit to go around for everyone to share.  If we realize that WE are not broke, then maybe we can find a way for many to prosper.  Some are suffering financially, but the GNP of our country is sufficient for everyone to make a living if we can create ways to provide an opportunity that neither government or business is doing.

A responsibility we all share is to provide a ladder up for anyone ready to climb it. By creating jobs through our connections around community needs and resources, we can. Collaborating for the common good will strengthen our neighborhoods and families through economic development opportunities made available to everyone.

The Allurement of Private Enurement

IRS 501 code reads, “The organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a § 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any managers agreeing to the transaction.”

Legal judgments on what this regulation means have been nebulous at best because it deals with invisible assets in relative terms.  It may be simple to count the dollars one receives, but but not so easy to measure the trust, influence, authority, good will, promises, teaching, gifts, relationship advantages, shame or gratitude that are connected to money received by members of an organization.  The term “inurement” is so much of a mystery that WordPress doesn’t even provide spelling for the word.

Although legal considerations matter since a nonprofit organization can lose or fail to obtain tax exempt status for violation of the private inurement code, the greater danger may be a loss of trust and transparency among members/supporters of an organization.  The negative results are more felt than proved on a specific budget line and can be harmful to much more than an organization’s tax status designation.

At the core of private inurement is a practice of using the assets of a nonprofit organization for personal gain.  It is often limited to examining the tangible investment of nonprofit funds to create exuberant compensation for paid staff of the organization, but a moral interpretation goes beyond legal definitions to suggest that anyone in leadership may unfairly use their intangible power or leadership over members to influence them is such a way that he or she profits financially as a result.

Leadership is a sacred trust that ought not be entangled with suspicion or mixed motives.  When considering a profit/nonprofit partnership, there is always the possibility that as members of a community enter business arrangements within the social network, there may be charges of private inurement, or using the organization for personal benefit.  This can happen when an auto mechanic, real estate agent, financial planner, construction contractor or Mary Kay representative does business within a congregation or nonprofit organization.

We may argue with a minster or nonprofit CEO who strongly influences their group to contract with their own family members to perform maintenance on properties owned by the nonprofit at a fee that is far beyond normal or for services that are never rendered.   We would probably not, however, complain about a son or daughter providing music lessons for a reasonable fee to members of the group (as long as no undue pressure is applied by leaders), or about the leader of a group selling books he or she has authored.  When members of an organization freely choose to do business with one another, the normal conflicts of commerce may arise, but the burden of unfair advantage among members should not be an issue.

Care must be taken to level the playing field of opportunity for all and ensure that no one benefits simply because of their position.  It is difficult to establish rules since the connection among friends is a primary dynamic of relationship marketing and coexists with more formal relationships and informal power within organizations.  One possible strategy is to be sure the organization benefits from any commercial endeavor and then the organization can choose ethically and legally how a leader would be compensated rather than allowing a leader to act independently with unlimited range of profit through the organization.

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.

Who wins in a profit/nonprofit partnership?

Social Business has become a term describing any enterprise that serves the common good and creates a profit at the same time.   The business world is learning that what is good for people and the planet is often good for business as well.  To be sustainable, business must integrate social networks and serve other interests alongside the financial bottom line.  A true social business attends to the needs and concerns of everyone in the marketing system.  Everyone is respected as a stakeholder and treated fairly with opportunity to benefit from business transactions.

In a partnership including more than company employees, management and stockholders or owners, benefits are mutual for all participants.  Goals are modified so that everyone who contributes to the work of the business profits from any success.  Even the definition of success may change as profit comes to mean more than monetary.  Google and other social media businesses demonstrate the value of treating everyone with meaningful advantages.  Subprime mortgage derivatives and credit default swaps that show little regard for homeowners, investors and the larger community demonstrate what can happen when justice, trust, integrity and care are not employed for the benefit of all.

Balancing social and financial profits takes on survival value for businesses in a world that is becoming more conscious of hidden or external costs to consumers, workers, communities and environment. This balance is also needed for any nonprofit project that requires material resources to fulfill it’s mission.  If a nonprofit chooses to partner with a for profit company, it is important that the goals, needs and health of each is addressed.  In an ideal partnership, the for profit company will benefit from growth of their business at the same time that the nonprofit organization will grow in effectiveness by using commercial profits and resources to meet their own goals and expand their impact.

Until both groups understand their need for each other, each will operate from the assumptions of competition and scarcity rather than belonging and abundance.  Every decision or policy will be measured by who gains he most and who loses the most.  Suspicion and self interest will poison the relationship.  Results will not best serve either the social good or business interests when they are viewed in opposition to one another.

So the answer is that everyone wins.  Policies, attitudes and practices that give attention to all stakeholders provides for the most sustainable social business.  The strongest social enterprises will be those that are financially sound.  The strongest companies are those that work according to the ethical, moral, social and spiritual values that guide most nonprofit organizations serving a cause greater than their own existence.

The next question is to find those who are willing to play a game where everyone wins.

Converting Social Capital to an Economic Resource

No conversion of social capital into financial capital is valid unless the value of social capital increases in the process.  This is common sense from a practical perspective.  If your connections, good will, hope and trust diminish, you lose the core of future productivity.  The energy becomes negative and not only hinders any hope of financial gain, but decreases what is needed for growth.

On a deeper level, however, if relationships are harmed in the process of converting social assets into financial support for programs, staff or facilities, you have just betrayed yourself as an organization.  The heart, the core purpose and life energy of an organization established to good must first do good for it’s own members.  To offend, divide or harm members in our attempt to do good is to violate the basis of what we claim to stand for.

Individuals may certainly disagree and even choose to come and go based on the changing direction of organizational goals.  This is different than seeking financial gain at the expense of social capital that has been built up over a long period of time.   Whenever social capital is redeemed to make a step forward, relationships should be strengthened at the same time, increasing the value of relationships used for advancement.

An example of increasing social capital at the same time it is used to accomplish a goal or it is converted into material benefits is when the group can feel a corporate pride in what is being accomplished  through the work, expectations, compromises made in the conversion.  Another gain in social assets can be seen when the visible result of using relationships to accomplish something of lasting value attracts new membership or deepens the commitment of current members.  Skills developed in converting social capital into tangible assets without harming mutually beneficial connections becomes an additional value to the organization in the form of new skills, experience and knowledge.

The joy of spending time together, trustworthiness that is maintained, willingness to sacrifice for hope of future benefits, ability to manage conflict, keeping primary purposes and values in focus, collaboration, use of individual gifts and making space for differences are essential to the health of any organization.  To be diverted away from these benefits in order to meet any fundraising goal or employ a new strategy is an unacceptable risk.

The nature of our social and spiritual life together will change.  Different priorities will arise.  New learning and goals will arise.  New methods of accomplishing the purpose we came together are necessary.  Our relationships will be tested.  But know that social capital is not to be squandered on an ambition that reduces the care and concern everyone feels for the organization, it’s work, and each other.

Be sure a careful accounting is being made with every change or challenge to the equilibrium of your group.  Never place such value on what can be seen or counted in monetary terms that securing it places your reason for existing at a risk that is too great.