Nonprofit organizations are often misunderstood, creating unnecessary barriers for the sector’s growth and unique impact on our community’s economy and livability. Each organization has a slightly different business model, but in the interest of demystifying things, these are 10 frequent misconceptions about nonprofit organizations (NPOs).
1. NPOs aren’t allowed to make money.
People conflate “nonprofit” with “anti-revenue.” However, a sustainable NPO must foster sustainable revenue streams, and can generate revenue in excess of expenses. The differentiator is what happens to that surplus. A for-profit company distributes it to owners. An NPO keeps unspent revenues in the system to fund program expansion, facilities, cash reserves, staff, or other functional costs.
2. NPOs should minimize administration and overhead.
The expectation that NPOs should suppress expenditures on overhead or administration is unrealistic, and keeps many organizations in perpetual subsistence-level cycles. This is driven by donors or other funding agents who demand their donations go only to direct program impact. Some grants or donations come with restrictions that ignore business reality. NPOs are subject to the same indirect costs as other corporations. The pressure to underfund those functions unnecessarily restrains program delivery and undercuts mission-related impact.
3. NPOs are funded by taxes.
“Tax exempt” is not the same as “tax funded.” Nonprofit corporations qualify for exemption from corporate income tax. That isn’t an exemption from all taxes. While some NPOs do benefit from competitive grants, contracts, or allocations from government entities, tax-exempt status does not mean direct support from your taxes.
4. NPO staff passion justifies low compensation.
The idea that NPO staff should accept a vow of poverty is pervasive. It takes for granted the idealism and passion most people in the sector feel, and ultimately devalues them. Competitive compensation is too often deemed an extravagance that detracts from program impact. That myth ignores the centrality of staff in delivering the program outputs. Poor compensation, lack of advancement prospects, and minimal professional development opportunities foster dismal morale, costly turnover, and sector-flight. An organization that cannot attract and retain excellent staff consistently is ineffective and unsustainable.
5. NPOs are inefficient, poorly-run charities.
Nonprofits generally exist to improve the human condition. The stereotype persists of the scrappy, micro-budget, volunteer-fueled organization created by a founder with lots of passion – but with limited business acumen. This leads some to dismiss the sector as a serious strategy for community growth. At the other end of the spectrum, large organizations with multi-million-dollar budgets and scores of staff are sometimes eyed with suspicion – as if the size of the budget undermines the validity of the nonprofit model. In reality, every organization in the sector is navigating the same path from ambitious start-up, through a mom-and-pop stage, to fully-functioning business in an evolution comparable to that in the for-profit sector.
6. NPOs can’t measure success.
For-profit success is tracked in many ways: net revenue, ROI, cost-benefit, share price, and other familiar lenses that boil down to how much money the company makes for the owners and shareholders. NPOs also have quantitative measures, like attendance, number of clients served, and meeting budget targets. But those data points measure outputs, not outcomes. There are ways to demonstrate meaningful and valued impact to stakeholders, like economic impact, qualitative data from constituents about how they are impacted individually, and regular tracking of societal issues being addressed. Yes, it is harder, but there is a parallel responsibility for stakeholders to become more comfortable with valid qualitative data and long-term impact measures to ensure the societal changes they value are affected.
7. Securing donations is simply asking people for money.
Contributed revenue is an essential strategy for most NPOs. Accounting terminology defines this as “unearned revenue,” a misnomer that disguises the time, expertise, effort, and money required to secure it. Professional fund development is more about listening than asking. Finding alignment between a donor’s values and the organization’s impact requires honest relationship building and patience.
8. Grants are easy money.
Securing consistent grant funding is arduous. Many foundations, corporations and government entities offer grants to support nonprofit work. While some applications are straightforward, most are extremely competitive with complex applications, hefty requirements, tight schedules and narrow funding targets. Grant-writing is a specialized skill and each application takes time. Development officers weigh the cost/benefit of each grant application, assessing the probability of success, the potential award amount, and availability of alternate funding against the staff time and the opportunity cost the application, monitoring, and reporting will require.
9. There are easy ways to generate more net revenue if NPO leaders were more entrepreneurial.
People new to the NPO world sometimes cling to quick-fix tactics. What seem like low-hanging fruit – open a restaurant, find a corporate “angel sponsor,” grow the gift shop, sell t-shirts, double the service fees, use more volunteers instead of professional staff – ignore issues of organizational capacity, mission, unrelated business income tax (UBIT), related cost centers, and other guardrails. Nonprofit business models are intricate, and there are never easy answers to complex questions.
10. Working for a NPO is easy.
The grass is always greener. For-profit employees may feel unfulfilled in a money-driven culture. A government employee may chafe with the constraints of bureaucracy. Both may look longingly to an NPO as a panacea of culture, benevolence, and empathy. NPOs can be very satisfying places to work, but that doesn’t make them easy.
The nonprofit sector is filled with passionate and talented professionals, striving to make a positive impact in the community. The sector addresses gaps and supplements underfunding in areas like homelessness, mental health, civil justice, history, preservation, art, music, food security, economic development, education, and advocacy for underserved populations.
Success requires fiscal discipline, visionary leadership, thoughtful management and devotion to a mission. Understanding, working with, and investing in the nonprofit sector as an evolved, critical partner is essential to our community’s economic vibrancy and health.
David Janssen has led non-profit organizations for over 33 years, and teaches a graduate course in the Business of Museums for Johns Hopkins University.
David has been the CEO at Brucemore, a National Trust Historic Site and cultural center in Cedar Rapids, since 2012.
