Profits at Non-Profits

Last week I was walking home from work, and without my iPod and earphones, had little ability to block out the loud conversation taking place behind me. One woman was telling another woman that she needs to get out of the non-profit sector because "there's no money in non-profits".

Meanwhile, over at Mother Jones, Josh Harkinson has argued that non-profit credit unions often serve their customers and their employees more effectively than giant corporate banks. I think this points to a fundamental misunderstanding, by a lot of people, about what it means for an organization to operate as a non-profit.

(from I-5 Design & Manufacture on Flickr)

There are some complicated legal and accounting details when it comes to classifying non-profits, but I think it can be summed up as simply as this: A non-profit organization is an entity that does not have owners or shareholders; a for-profit company is an entity that does.

A lot of people think "non-profit" is synonymous with "non-revenue". That's true in a few cases, but not across the board. A non-profit can have customers and funders, the same way a corporation can have customers and investors. A non-profit does not have to be a charity that relies entirely on donations to stay afloat. It's bad deductive reasoning to think that because all charities are non-profits, that therefore all non-profits are charities.

Consider two hypothetical banks. One is non-profit credit union and the other is for-profit bank. They're both relatively conservative, don't engage is risk-taking, and at the end of the year, each has $1 million leftover after it's paid the bills.

What does the for-profit bank do? It divvies up the money and cuts checks to the owners (shareholders) based on how much of an ownership stake each person has. What does the non-profit bank do? It gives a raise to its employees and re-invests the rest of money back into the business, so that it can grow and expand and better serve its customers.

Which of the hypothetical companies is better to work for or do business with? Plenty of people would say the non-profit bank, despite the broad claim that there's "no money in non-profits".

Of course, the world isn't as simple as this; but for-profit companies lay off employees, slash benefits, and screw their customers all the time. To say that they're acting in their best interest because they're motivated by profit is only partially true - it's their owners that are motivated by profit. Sometimes, the employees and customers are also the owners, but not all of the time. When they're not, there can be conflicting interests.

Saying "there's no money in non-profits" is as vague as saying there's enormous money in the field of law. Some attorneys work for corporations, others work for governments. Some work for rich clients, others are public defenders. Some prosecute the bad guys, others defend them. How much money there is to be made in law is pretty contingent on exactly what type of law your practice.

Sometimes the non-profit model works, other times it's not the best fit for an organization. Sometimes, like in the case of banks and credit unions, they can even exist side-by-side.