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Why Today’s Not-for-Profits Need to Operate as “Mission Driven Businesses”

March 26, 2014

By Ron Ries

In the current not-for-profit environment, with revenues tight, expenses increasing, and more “competition” from other service providers, not-for-profit organizations must be focused and effective. Generally, the phrase “Mission Driven Business” is used in the NFP world to denote an organization in which growth and revenue drives the services performed in pursuit of mission fulfillment.

Webster’s dictionary defines business as a “purposeful activity.” In the past, when I asked my NFP clients, “How is business?” they usually looked at me strangely and/or laughed, responding “We’re a NFP, not a business.” I always told them, “You are managing a $10 million (or $50 million or $100 million) dollar business; you apply revenue toward expenses, whether it’s payroll, facilities costs, or supplies, in order to accomplish your mission. Most of those clients understood my message.

Many NFPs today, especially larger ones, are embracing the mission driven business concept, perhaps because they have a substantial amount at risk, in dollars managed, in clients served, and also in terms of public opinion.

These large institutions also tend to have influential Board members who are themselves active in the for-profit world and are successful business people.

So what are the key parameters that NFPs need to work within in order to operate, sustain and grow a successful organization?

  • Prior to each fiscal year the NFP needs to prepare, review and approve an operating budget with the Board, and, when possible, make sure it represents a modest surplus, or a “breakeven” at worst.
  • During the year, continually compare operating results to budget in order to help catch any unusual variances in either revenue earned or expenses incurred. Evaluate these variances, and especially if the results for the period are below budgeted amounts, attempt to identify those areas and remedy them as soon as possible.
  • Review all programs within your budget to determine that they are operating at a surplus or breakeven or meeting your desired objectives if not. Determine whether these programs represent services that are still within your mission and are achieving favorable results. This is a continuous process.
  • Review methods for allocating indirect costs to programs or administrative needs to properly identify program effectiveness.
  • Review all fiscal results periodically with your Board to maintain total transparency between management and your Board.
  • Review results of operations with applicable senior staff members and other staff, collaborating as a team to modify any existing programs or support needs, especially those that are underachieving.

All of the above steps may appear to be common sense, but we have witnessed many occasions where a member of the NFP community has failed to follow these guidelines when discipline and basic fiscal and management oversight are not part of an organization’s DNA.

Another element that is worth mentioning is the “Overhead Myth” that was begun by an open letter to the donor world by the three leading sources of information in the NFP community – Guidestar, Charity Navigator, and The BBB Wise Giving Alliance. This letter warned donors not to overplay the use of overhead as the sole rationale for evaluating a NFPs performance.

Each donor or supporter of an organization needs to understand the “business mission” and get a better understanding of the program service provided, and thereby, develop insight into what costs are required to fulfill that service. These include all costs necessary to fulfill the organizational mission, whether they are program, administrative, fundraising, or otherwise.

It’s interesting that this focus on overhead is so entrenched in the NFP community, when similar concerns are not common in the for-profit marketplace. The cause of this may be the public sector’s greater “exposure” to and “comment” from the public at large. This differentiation highlights the fact that donors want to feel that they have maximized the amount donated to program activity rather than administrative costs.

Government also continues to scrutinize high levels of overhead in a NFP as a sign of inefficiency or mismanagement. Although this can be an indicator of problems, an effective support structure must be in place to run programs and to operate “a business.” As such, the excessive focus on overhead and other non-programmatic expenditures is often harmful.

A final significant issue for today’s NFPs is the idea that they need to maintain “cheaper” labor costs at all levels of management. The tide appears to be changing, but it needs to change more rapidly. To be successful, NFPs need to maintain a quality professional management team.

This includes bringing in people from the business and financial communities who can demonstrate positive leadership and implement successful business plans. These “business people” will also need to learn the culture of their new workplace in order to effectively apply their skills and talents in a balanced manner.

As mentioned before, in some NFP circles, there may be too much competition, creating an environment of ineffective management and service inferiority. Organizations may wish to consider the potential value of joint ventures, mergers or affiliations with other NFPs so as to achieve “profitability” and success.

There appears to be a trend toward an increased number of these affiliations in today’s marketplace. A successful affiliation combines the skills and talents of the staff and management of all involved organizations, leverages non-programmatic costs across a large scope of services, and reduces pressure on funders when considering previously competing giving opportunities.

These are difficult times for the NFP community. They require a positive outlook and the recognition that even this segment of our economy needs to focus on Mission Driven Business to achieve growth and sustainability in the future.

 


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