By Paul C. Hudson
Managing Director, Hudson & Holland Advisors, LLC
AABLI Board Member and Faculty Member
Some basic misconceptions about nonprofit organizations have taken root in our society. It may surprise you that, as nonprofit executives, trustees, consultants, foundation executives and government administrators, we are among those who have perpetuated them. These misconceptions—think of them as Sacred Cows—have developed as a result of our charitable culture, tax regulations, legislation and funding guidelines.
In my experience, these Sacred Cows often are accepted without question, as if printed on the flip side of the Ten Commandments. Unfortunately, our belief in them supports the status quo and contributes to a lack of flexibility and innovation within the nonprofit sector.
So what are these nonprofit Sacred Cows?
SACRED COW #1 – A nonprofit is a charitable organization with a social mission, not a business, and thus is not controlled or constrained by basic business principles. Several factors contribute to this misconception and support its “sacred” nature:
- The concept and meaning of “charity” in our culture—which often includes the voluntary provision of help, usually by nonprofit institutions, to those in need—is often in direct conflict with the general meaning and objectives of business. Simply put, the purpose of a business is to achieve personal gain from the sale of a product or service.
- Nonprofits have a history of relying on charitable giving and voluntary donations, contrasted with businesses that depend on sales of products and services based on some form of quid pro quo.
- A nonprofit, by its very nature and name, is not structured to be profitable. As a consequence, it is not designed or structured to operate like a business.
- Nonprofits operate differently from businesses and thus are not constrained in the accomplishment of their social missions by the principles and disciplines of business.
- Nonprofits are different from and not competitive with businesses, thus the 501c (3) designation, which further supports the idea that nonprofits are not business
Belief in Sacred Cow #1, including the aforementioned contrasts and distinctions between nonprofit and business, is one reason nonprofit management rejects many basic business principles in operating and managing nonprofit institutions.
Why should we consider tipping Sacred Cow #1? Because upon closer examination, we find the following:
- Definition of business—A business is an organization involved in the trade of goods and/or services to consumers. It is a legal entity with income and expenses. Nonprofits are involved in the trade of services to consumers. They are legal entities with income and expenses.
- Nonprofits and for-profits are both businesses. In fact, the major difference between a “For Profit” business and a “Nonprofit” business is that the former is seeking personal or investor enrichment, while the latter wants to fund charitable services and sustain the staff, administration and other resources necessary to accomplish its mission.
- It is entirely possible that a nonprofit could be accomplishing its social mission while failing as a business. Both must be operational for nonprofits to be successful.
What are some examples of business principles that apply to nonprofits?
- Market competition. Nonprofits operate in a competitive environment. Chances are there are several nonprofits in your market that have a similar mission, offer similar services, focus on the same constituencies and solicit the same funders. Nonprofits need to develop strategies to be more competitive, including strategies to reduce competition.
- Nonprofits must develop business plans that support the organization over the long term and take into account changing internal and external environmental factors.
- Competitive compensation. Nonprofits should pay competitive salaries. Nonprofit organizations experience high employee turnover, primarily because they seldom pay market salaries. Organizations often pay entry level salaries that are allegedly justified by the mission. Funders play a role in restricting compensation, but organizations need to find ways to develop discretionary income to support compensation strategies.
- Nonprofits must create positive net income strategies to build reserves, support growth and facilitate independence. In many instances, nonprofit funders restrict nonprofit profitability and often fail to fund the full costs of delivering charitable services.
This is the first in a series of blogs by Paul Hudson, Managing Director of Hudson & Holland Advisors, LLC, on “Tipping Nonprofit Sacred Cows,” March 8, 2016.
Paul C. Hudson is also the founder of Paul C. Hudson Consulting, which advises and assists nonprofit organizations with structuring, financing and implementing strategic alliances including collaborations, mergers, acquisitions, partnerships, cooperatives and other strategic restructurings. He is also the immediate past Chairman and Chief Executive Officer of Broadway Federal Bank. Hudson currently serves as the Chairman of the Center for Social Inclusion and Ebony Repertory Theater, and is past Chairman of the Los Angeles City Community Redevelopment Agency and the Los Angeles NAACP. He serves on the boards of the Los Angeles City Housing Authority Board of Commissioners as well as the Tuskegee Airmen Scholarship Foundation, and has served as a member of the Los Angeles County Metropolitan Transportation Authority board. Hudson earned his B.A. and J.D. degrees from the University of California at Berkeley and is a member of the State Bar of California and District of Columbia.