This article is about the characteristics of a non-profit organization as compared to those of a profit driven operation. So what are the differences? Actually there are NO DIFFERENCES between the two types of operations. Think about this for a moment, both have to make enough money to continue to exist. Without funding, a non-profit will go out of business, and there have been many that cease to exist because of the lack of funding. The same goes for a profit driven operation. Without a profit, you will go bankrupt and cease to exist.
So why is there all this misunderstanding? The answer is keyed to the order of the primary objectives for the business/organization. The best way to understand this is to look at a regular business operation. What are the primary objectives? Let’s take a look:
1. The number one objective or primary characteristic of any business is MAKE A PROFIT; this is why capital was originally invested. This is why somebody came up with an idea and decided to sell this idea. It doesn’t matter what it is, it’s driven by profit. You’ll hear about some companies that don’t state this as the first objective, but the reality is that the investors, current stockholders, and even the owner want the company/business to succeed. It is driven to make money.
2. The second objective is to sell or make a product/service that is desired by as many people as possible. Whether you sell widgets or dig a ditch, you want to the best and for your customers to talk about you in a positive light. PRIDE is at stake here, you want your company to be the best.
3. The third characteristic of all business operations is to provide for the security and long term employment of the folks that support you, i.e. your employees. They work hard for you to make that profit and for you to enjoy that pride that comes with owning and operating a successful business. So you want to take care of them. It benefits you and it is good for our society for people to work somewhere where they make a good living and provide for their families.
Now in the non-profit world, the same three characteristics or primary goals are exactly the same. The difference is the order in which they exist. For the non-profit organization it flows as follows:
1. The number one objective matches their mission statement, to do some type of good for our society. Notice this is the number two objective for the profit driven company. For a non-profit, making money isn’t its primary goal; to SERVE is the primary purpose.
2. Unlike the profit driven business, non-profits believe that it is best to provide for the security of the folks that work for the organization over making a profit. This makes sense because they generally don’t pay as well as the profit driven business, so it is important to have staff that care about the primary goal of serving the community at a lesser wage. The staff know that the organization will do everything in its power to continue and provide security in this job. They need the employee to stay for as long as possible. Again, this helps to achieve the primary goal of service to the community.
3. Finally, the non-profit needs to make money to continue in operations. Now they don’t call it a profit, they use the term – Revenues in Excess of Expenses. Notice this is semantics at the end of the day, but we accountants use this terminology to identify what type of operation we refer to when discussing financial reports. I can’t stress the importance here, a non-profit MUST MAKE A PROFIT to survive. Without a profit, ultimately the organization will cease to fulfill the primary objective.
So, in summation compare the two types of entities:
For Profit Non-Profit
# 1 Goal Make a Profit Serve Society
# 2 Goal Sell a Service/Product Employee Security
# 3 Goal Employee Security Make a Profit
So this area of Business Economics is dedicated to helping the non-profit achieve ALL three objectives. As you learn more, Act on Knowledge.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you. If interested in my services as an accountant/consultant; click on ‘My Services‘ in the footer of this article.
Other articles related to non-profit organizations and tied to the subject matter above include:
The 501(c)3 Organization – an introduction to the Internal Revenue Service Code section related to non-profits. This designation is critical for donors because the designation allows for tax deductible gifts. Find out about this designation and how an organization goes about getting identified as a 501(c)3 charity.
Fundraising with Golf – Does it Work? – now that you may have a non-profit, find out how difficult it really is to raise money. This is just one example of the multitude of various ways to raise money for you non-profit.