Opinion: Businesses, nonprofits not as different as it seems

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I was sitting in a board meeting, and we were going over the financials. The treasurer talked about budgets and larger expenditures. It was my third or fourth board meeting and I found myself asking a very basic question: How are we doing? I raised my hand and asked a simple question, “Are we profitable?”

There was an audible gasp in the room.

The treasurer responded by telling me that we were a nonprofit who should be focused on mission, not money. A few other board members echoed the sentiment, some being visibly annoyed. The treasurer’s report continued without an answer to the question. As I dug into the financials later, I learned that nobody really knew the answer. The nonprofit’s financials, while accurate enough to keep board members out of jail, weren’t insightful enough to help us make real decisions. This is a problem shared by both for-profit and nonprofit organizations.

Financials are created by accountants who often are tasked primarily with filing tax returns. While you might think that there is a “right way” to set up your financials, the truth is that there are lots of ways to do it. Many accountants for nonprofits set up the financials in a way that makes tax preparation and bookkeeping as easy as possible with little to no regard to whether the financials are organized in a way to help the organization make good decisions.

Very successful, well-managed organizations spend time organizing their financials in a way that is both accurate and insightful. These financials aren’t a look in the rearview mirror to tell you how much money you end up with and what you report to the IRS. Instead, they become a model that indicates the health of the organization and yields powerful insights that help leaders guide the organization moving forward.

Perhaps one of the greatest roadblocks presented to nonprofits is that they are called “nonprofits.” If 2020 taught the nonprofit community anything, I would hope that it’s that nonprofits should worry about profit.

Revenue flowing into any organization is a signal of value of the service that the organization provides. When a nonprofit organization loses focus on this, they lose sight on nothing less than their mission and who they serve.

Mission and money go hand in hand. When a nonprofit loses sight of its mission, the service suffers and the money starts to dry up. When the money starts to dry up, the nonprofit is forced to start playing defense and making cuts in service. This reduces the nonprofit’s ability to fulfill its mission, often resulting in decreasing revenues and additional cuts. It’s a spiral that too many nonprofits are familiar with.

When a nonprofit is struggling, the leadership should fall back on both the mission and the money. The nonprofit should explore and radically understand its own mission (what it does), its vision (where it’s going) and its values (what it stands for).

I like to say that if the nonprofit is playing a game, the mission is the definition of the game, the vision is what winning looks like and the values are the rules to the game.

But understanding mission alone doesn’t lead to transformation. Organizational success lies in the space between passion and value. You have to be passionate about your cause, but it also has to have great value for people. Following the money helps organizations find the areas that are particularly valued. It is actually very helpful to ask my original question: Are you profitable? Which services pay the bills? Where do you make most of your money? With this understanding, the organization can then spend time on maximizing “profit.”

In a business, profit is used to pay investors or to reinvest into the company for growth. In a nonprofit, profit is used to run additional services that are less profitable or to expand existing services. As my friend Katie Davis, former CEO of Big Brothers Big Sisters of the Ozarks and now a Great Game of Business coach says, “More money, more mission.” In other words, you can’t feed the hungry very long if you can’t even feed yourself.

Nonprofits need to embrace the idea that they are a business that pays less taxes.

Those that have learned this lesson are making the biggest impacts on the community. Those that avoid focusing on money are ironically constantly trying to dig out of the hole while their mission gets lost.

Don Harkey is the owner and CEO of People Centric Consulting Group. He can be reached at donharkey@peopleccg.com.