Streetsmart Financial Basics for Nonprofit Managers

Chapter 18Profit: Why and How Much?

A chapter on profitability in nonprofit organizations may seem quixotic, but only because there is an unspoken understanding that we never discuss the subject in public. It doesn't help that the term nonprofit seems to settle the question before it's even raised. The result: those connected with nonprofit organizations—consumers, funders, regulators, and even some managers—have no vocabulary and no common understanding about this financial need that practically cries out for careful attention and management.

This is unfortunate. Profit is part of any organization's economics. The question of who shares in the profit, which is what distinguishes nonprofit organizations from for-profit ones, is really only the last and most uninteresting aspect. Much more important is how it is generated, why, and for what it is used. The lack of frank attention to the subject is what causes us to possess such little collective knowledge of it. The purpose of this chapter is to explain why nonprofit organizations can and would want to earn a profit each year and to suggest ways of making one.

Profit Defined

First, let's define profit. For our purposes, we will consider profit to be an excess of revenue over expenses during any given fiscal period (happily, this happens to be the official definition anyway). As shown earlier, profit will land on the balance sheet as an increase in a nonprofit's net assets, offset by an increase in some asset or mix of assets. ...