If you lead a nonprofit, you already succeed at a harder job than your friend Susan who directs a forprofit company (ABC Motors) of similar size! You may notice that you have unique pressures that Susan does not face at ABC Motors. She seems to have more cash and less regulation while you try to have real impact with less cash and more regulation. Many nonprofit leaders experience unique frustration, disillusionment and loneliness in their work.
Here are ten ways in which your nonprofit is different and harder to direct than ABC Motors.
- Nonprofits serve the 5% of the market that forprofits have abandoned
The USA has a $21 trillion market economy. It is very efficient for most of the nation. Unfortunately, a market economy fails for about 5% of the total activity in areas where no one can figure out how to make money. Housing the homeless, feeding the hungry, and other good services are failures of a market economy. The market answer to needed but unprofitable activity is to give the problem to Nonprofit Leaders! Nonprofits make up a unique 5% of the American economy (about 1 trillion dollars) where everyone else has already failed..
- More dependent on government contracts so revenue does not flow to surplus
The biggest sources of revenue for nonprofits are government, fee for service, gifts and grants. Government contracts are the largest source of nonprofit growth. Most nonprofit leaders struggle with stipulations of government contracts. These often promote equal access over equal results and do not fully express the mission of the nonprofit. Government money is virtually required for growth in any nonprofit over $5 million revenue. There is also no reward (surplus) for excellence or efficiency in a contract.
Forprofit companies commonly use product pricing or fee for service and build in a robust profit target or turnover. Surplus profits from sales can be used without any restriction. Forprofit contracts with government may have rewards for performance. Forprofits may have more capacity for government grants that require strategic and technological innovation. These grants are generous compared to performance grants that nonprofits typically accept. Many nonprofit contracts are where government feels confident of performance expected and wants a highly regulated bargain.
- Limited access to debt financing for growth
Most forprofit corporations have fixed assets of Property, Plant, and Equipment (PPE). These can be mortgaged or serve as security for a loan for growth. Small forprofits are often required to use personal funds or assets as security for loans. They are willing to do this because they own the company and would never leave the company while still responsible for its debt. Larger forprofits can issue bonds which allow them access to cash while retaining ownership.
Bonds are expensive to issue and 75% of all nonprofits are less than a $1 million in revenue and far too small to afford the cost of the bond issue. Nonprofit corporations can’t write off the interest paid on bonds as a tax deduction and reduce the cost of the issue (in contrast to forprofits).
- Limited access to equity markets for growth
New ideas and programs require energy – usually cash is required. Forprofit corporations can sell shares based on their past history and future plans. Startups look for angel investors with the same idea of potential future profits to be shared. Nonprofits cannot distribute the surplus from financially successful activities so they do not attract investors.
- Revenue ceilings typically much less than forprofit
Without easy access to equity and debt markets, very few nonprofits have grown past $50 million in revenue. Since 1980, less than 50 nonprofits in the USA have increased beyond that level of activity. In addition, retained earnings (another source of growth) tend to grow slowly for nonprofits because government contracts often are performed at a deficit.
- Agency problem in that clients who receive services often are not the funders
Most forprofit companies are paid by those people who receive the goods or services. Nonprofit financing from charity and government involves double stakeholders – the funding source and the client who receives the services. The workload is double for the nonprofit leader. They must educate the funder on what services are meaningful and also hear the client need and respond appropriately.
- Hard to have 20 year focus based simply on social impact
Entrepreneurial business has a 20 year focus on the Big Hairy Audacious Goal (BHAG). This makes sense because the owner is accumulating wealth along the way. The path to wealth for many people has been to develop a business, work with passion and long hours and reap a generous reward.
Nonprofit leadership is inspired by mission. The few nonprofits that continue on a long term strategy to succeed pay a leadership team generously. In a study of 990s for nonprofit factors for failure and success, agencies which paid 4 or more leaders $100,000 or above tended to retain leadership and stay on course. Many nonprofit boards undervalue the competence of a long-term leadership team.
- Boards of directors are present from inception
Boards of Directors are one more management task. Beverly Behan writes that the real management of the Board is with the CEO and less should be expected of the Board Chair. Nonprofit leaders will know this challenge immediately because board formation happens before or in the first days of nonprofit existence. Many nonprofit leaders are foiled completely or weighed down by operating boards who enjoy the nonprofit as a hobby and diversion from their forprofit jobs.
Forprofits are usually started by an owner or by partners. New forms of financing are usually required for growth after revenue tops $100 million. Shares are offered and a board is formed well after the foundation values, and strategic plan are in place.
- Nonprofit leaders are paid less to lead agencies of similar size to forprofits
Who are the best paid nonprofit leaders? Usually, presidents of universities and leaders of medical enterprises are paid salaries of which the rest of us can only dream. Those salaries are priced high in place of stock options which cannot be offered to a college president for excellent performance.
At the more normal level of nonprofit leadership, we are never going to be reimbursed fully for the knowledge, wisdom, and networks that we possess. When there is a turnover in the nonprofit C suite, there are less applicants who are highly qualified by experience and connected in networks as the replacement. The lower compensation does change the pool of available leadership.
- Nonprofit fund raising behavior is constrained by community values
Let’s assume that our nonprofit needs $10 million dollars for a life saving vaccination program. In this example, we have two choices, Choice one – we can hire a fund raiser who will charge $20 million in fees and produce the $10 million that we need in 3 months and save 1,000 lives from premature death. Choice two – we can have some private receptions and raise $2.2 million per year for five years at a cost of $1 million total (a total net income of $10 million). Which will your board choose?
Most nonprofits and most media would opt for the ‘reasonable’ fund raising costs of 10% and react in horror to fund raising costs of 66%. A forprofit perspective would immediately allow the higher costs because the total raised is the same and the 1,000 lives are saved. Some nonprofit ‘best practices’ are unique to this community.
With these disadvantages, one might ask why anyone wants to lead a nonprofit! There are unique opportunities available through the nonprofit structure.
- Nonprofits support justice, compassion, & the creative spirit of humanity.
Major forprofit companies are discovering the need for values oriented behavior but values find their truest home in the nonprofit world. If nonprofits did not exist, would government, religion, business or military fill the need? Nonprofits add to the social good when other forces fail.
- Service agencies require little capital to begin
Like nail salons and flea markets, nonprofits don’t require much cash to start. While many articles detail the fragility of nonprofits, they are like a rosebush. Many of the flowers will die quickly but a few will thrive.
- Nonprofits are more likely to get gifts and foundation grants
People might make one-time contributions to a forprofit toy drive or other visible act of compassion, but nonprofits understand the human need to give as well as receive. They are a natural home for gifts and grants.
- Difficulty of leadership is not a way to measure value
This article is to help nonprofit leaders understand that they are stronger than they may imagine. It is a very noble cause to lead a nonprofit even though nonprofit leaders need to be smarter and better than their forprofit peers.
Did you come from social service or teaching and now you want to make a real impact with your leadership and legacy? It is very possible to do and many nonprofits are changing lives in every community.
The best way to appreciate and strengthen your leadership is a commitment to lifetime learning. Scaling Up and the Four Decisions are one planning system that equips you to spend less time in the nonprofit problems and more time on the nonprofit results. Choose some planning system and build your skills continuously so that you feel less stress and more satisfaction for all you are giving to the human community.
And contact me Ronald.Tompkins@TAConsulting.live for a partner in planning.