Pulse of Philanthropy: The Business of Being a Nonprofit
At the Door County Community Foundation, one of our primary roles is to connect generous people to the charities that help our community thrive. In nearly two decades of introducing donors to nonprofit organizations, there’s one observation that I’ve heard countless times: "That nonprofit needs to run more like a business."
It’s always said with the best of intentions. At the Community Foundation, we encounter enormously successful people with exceptional business acumen. Their advice is offered with a genuine desire to help. Generally speaking, I also agree with the sentiment.
However, there’s something about that statement which has always bothered me.
Nonprofits are businesses. They hire employees, offer services, manage budgets, and make difficult financial decisions. To be a successful enterprise, nonprofits need to operate efficiently and manage their resources responsibly. Being a charity is not a free pass to being wasteful or inefficient.
Yet there’s a reason we distinguish between for-profit businesses and nonprofit organizations. The difference isn’t simply what happens to the money that’s left over at the end of the fiscal year. What differentiates them is something far more fundamental.
Think about how a typical for-profit business works. It offers a product or service that people want at a price that’s more than what it costs the business to offer that product or service. That difference is its profit. If the business is going to be successful, it eventually needs to generate profits on a consistent basis. If it can’t, the for-profit business will ultimately fail.
This is capitalism at its finest. It uses the power of free markets and competition to drive efficiencies and generate prosperity. But it has one important limitation. What happens when a community needs something that cannot be provided profitably at a price people can afford?
That’s often where nonprofit organizations enter the picture.
Consider the 11 food pantries that comprise the Door County Food Pantry Coalition (feeddoorcounty.org). Unfortunately, families that are struggling to make ends meet need the help of our food pantries. There’s no charge for the groceries that our food pantries provide, so they will be forever unprofitable. That’s why we as a community must step forward and help with our contributions.
This unique aspect of nonprofits isn’t limited to human service organizations. Think of Third Avenue PlayWorks in Sturgeon Bay. Every spring, my wife and I purchase season tickets. Yet before every performance, we’re reminded that the price of our tickets only covers about 30% of what it actually costs to put on the show.
Charities don’t exist because they’ve failed to figure out how to make a profit. They exist because some of the goods and services we want as a community cannot be adequately provided by the free market alone.
Of course, a charity that consistently spends more money than it has will eventually fail, just like any for-profit business would. A nonprofit’s employees still need to be paid, its bills covered, and its financial resources managed efficiently. But in a for-profit business, generating a profit is usually the point. Profitability is one of the key measures of a for-profit business’ success. In the nonprofit world, generating a financial surplus is simply a means to an end. The real measure of a nonprofit’s success is whether it is accomplishing its charitable mission.
I’m not suggesting that for-profit businesses only care about money or that nonprofits have a monopoly on doing good. Many of Door County’s most respected companies are built around a powerful sense of purpose and are led by owners who care deeply about our community.