Profitable not for profits?

By Jane Arnott, General Manager, Consulting and Business Services

We recently held an ExecNet in Adelaide with the title of ‘Selling Without Selling Out’. The shift to fee for service funding – particularly in the NDIS and aged care environment – means that not for profits are having to engage with end consumers as the purchasing customer and to compete with each other for that customers’ dollar. The shift to a sales culture is hard for many as it is perceived to represent a departure from the core values of the sector. For staff working in not for profits, the reality of this change is evident all around them, but not for profit directors may have further to travel to get into a more commercial headspace.

The recently published AICD Not for Profit Governance and Performance Study: Raising the Bar revealed that many directors are still uncomfortable with the concept of their not for profit making a profit. Clearly the language itself – the fact that we call ourselves ‘not for profit’ – sets an expectation that we shouldn’t be making profit, but it sits at odds with the economic realities of running organisations, particularly in the current funding environment.

Key findings from the AICD study

The AICD research found that 14% of surveyed not for profits made a loss last year, 20% broke even and 64% made a profit. Of that 64%, one quarter made profits of less than 3%. Whilst the positive angle on this is that nearly 50% of those surveyed made more than 3% profit, and 50% have seen a growth in net assets, the attitudes of many directors to profit is worrying. Whilst 36% thought that profits of over 10% were acceptable, and 27% were comfortable in the 4-5% range, over a quarter thought it was only appropriate for not for profits to make profits of 3% or less, so barely sufficient to keep up with inflation and certainly inadequate to fund growth, development or change initiatives.

Perhaps unsurprisingly, these attitudes are also reflected in the information that directors expect to see as part of regular board reporting. Profitability isn’t being widely monitored by organisations: only 26% of respondents consider growth in fees, sales and other income as a measure of organisational effectiveness; 22% look at growth in fundraising income or donations and 12% look at growth in profits.

In an era of increasing social investment and social enterprise, these responses sit at odds with the sector’s direction of travel. Part of the reticence about profit is based on ignorance – one director thought it was illegal to make a profit – but there is also the very real issue of funder behaviour. This impacts in two ways – one is a perceived risk that donors will not give to organisations that are seen as profitable, the other is the terms of many funding agreements that require core administrative costs to be cut to an absolute minimum, alongside a requirement to return any underspend to the funder.

Why it’s okay to make a profit

Whilst not for profits are experts in making something out of very little, we can’t run on thin air and, as the AICD report makes clear, profit (above and beyond inflation) is necessary for long-term sustainability. If that’s not enough to convince your directors, here are some other reasons for making profit:

  • Many not for profits are dealing with highly complex social issues that require sophisticated interventions delivered by skilled and experienced professionals. Consumers, donors and volunteers expect professional, well presented, modern organisations that can engage with them through digital technologies. None of that comes for free, and organisations need to invest in new resources and technology, just to keep up.
  • The change in funding models requires not for profits to have sufficient cash flow up front to be able to manage payments in arrears. Commissioners of services will look for organisations that can demonstrate that they are sufficiently financially robust to work with this model.
  • Social investment and social enterprise models – increasingly popular as funding and business models – are predicated on the assumption of profit. You can’t repay an investment without making a profit.
  • Mission – social needs are ever changing, and organisations need to adapt existing services and pilot new approaches to ensure they continue to make, and to maximise, positive impact on communities. This requires investment.

So how do we move thinking on?

We should be aware of the unintended consequences of the language that we use. ‘Not for profit’ is a convenient term, widely used, but it sends a mixed message. Unlike private companies, our primary purpose is not to generate wealth for shareholders. However, we can make a profit; we just can’t distribute it for individual gain.

Similarly, claiming that every cent goes to the cause may work well for fundraising, but it misleads donors and sets unrealistic expectations about the need to invest to build capability and capacity so we can continue to deliver the best services to end beneficiaries.

Finally, nearly half the directors interviewed in the AICD survey had no previous experience on a not for profit board. Thorough induction; ongoing training and briefings for directors are critical to ensure they understand, not just their organisation’s, but the broader context and how the sector is changing and evolving. This should then be underpinned by ensuring that you are reporting to the board on the things that really matter – including changes in income and profits.

Keen to discuss your organisation’s options? Contact CBB’s General Manager, Consulting and Business Services Jane Arnott via:

Phone: 1300 284 364
Mobile: 0423 204 704

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