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.

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.

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.

Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi

Born March 3, 1882, died January 18, 1949, Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi was a was a businessman and con artist in the U.S. and Canada better known as Charles Ponzi.  His name is now a code word used to describe the questionable business schemes of Charles Ponzi.  Anyone who considers social networking and deals in public trust should be aware of practices that can direct even worthy endeavors toward becoming a ponzi scheme.

The primary nature of a ponzi scheme is collecting money from people while promising return that will come from money to be collected from other people, who will receive return from money to be collected from other people…. etc.   Two realities make this illegal unsustainable and fraudulent.   One reality is that the “other” people that money is to be collected from eventually run out and everyone still expecting a return has lost their investment with no way to recover it.   The second reality is that there is no real business of substance that is creating income for investors outside of new money from new investors.

Entering a legitimate profit/nonprofit partnership is not a ponzi scheme if there is a real business venture earning actual income.  Even if the profit from sales or services is layered and shared by many participants in the business, it is not considered a ponzi scheme.   Profits are always shared unequally among stakeholders in any business.  CEO’s, VP’s, managers and even customers (by way of rebates, discounts, referral rewards, etc) can share in company profits.  There is always a “pyramid” structure that pays out profits by some set of salary, employment or commission standard.  If the standards for rewarding stakeholders in a real business operation are transparent and each party agrees as part of their participation, it is a contractual arrangement that can benefit all.  Some will always receive more than others depending on the agreed upon structure at the time of employment, sale or investment.

But Charles Ponzi has brought to light more subtle forms of betrayal than the blatant illegal sealing of funds under false pretenses.  The success of his practices reveal the nature of social connections and human nature that made it possible for him to steal 20 million dollars from people by 1920 after arriving in the United States from Italy in 1903 with just $2.51 in his pocket.  Although he died in poverty after spending many years in prison, he taught us much about how to use people for personal gain.

Ponzi was an expert in getting people to act from a spirit of greed and the feeling of being treated “special”, better than others.  He used the power of claiming to have “secrets”, allowing certain people into the “in crowd”, promising something for nothing, and inspiring others to take great risks.  He was able to leverage good will, trust, fear, statistics and immediate rewards to gain a fortune.   Those used were often the most trusting or most desperate.   These same pressures can be used in even legal sales, services and investment opportunities.   They are no more noble in real business than they are in a ponzi scheme.

When working with nonprofit organizations, the opportunity and approval for abuse can be even greater since it is “for a good cause”.   Also, supporters of a good cause are often more trusting and abuse of funds may not be discovered as quickly because many donors/participants are involved and may not be seeking personal reward.  This makes the need for high standards and ethical principles even more critical when joining nonprofit and for profit endeavors.