The Need for Profit in a Nonprofit Organisation

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A nonprofit organisation needs an income to pay for daily operations. With a regular income stream, nonprofits can cover the cost of office space, equipment and staff. Funds generated can also be used to cover travel and marketing expenses. To operate daily, there is a need for nonprofits to make a profit…

Is it ethical for a nonprofit to make a profit?

Yes!

Like any ‘for profit’ business or organisation, nonprofits need money to support their activities.

Nonprofits tend to be set up to aid local, national or international causes, supporting those causes costs money.

However, nonprofits will place a different value on profit, compared to a company that’s in business purely to make money.

A nonprofit organisation will assign income and profits to a cause, with a view to making life better for vulnerable people.

Profit that’s generated by nonprofits is not about growing the value of their organisation, but increasing their value to society.

‘For profit’ businesses are primarily geared to make a profit that will ultimately increase the value of the company.

Where ethical lines get blurred is if a nonprofit organisation misappropriates funds or accepts funds from a source that goes against their values.

Why is profit important for nonprofits?

Most nonprofit organisations are set up to tackle humanitarian crises, societal issues, provide support for debilitating illnesses or serve the local community.

With humanitarian, social, medical and other issues across the world rising, it’s no longer enough for a nonprofit to make what it needs to operate daily.

Nonprofits need to profit to finance local, national or worldwide projects.

Plus, nonprofits are incredibly important to the economy.

The most recent figures show that, in the UK, nonprofit organisations contributed £12.2bn to the economy.

How does a nonprofit make a profit?

Most nonprofit organisations will set a funding target to cover the cost of operations, anything beyond that can be considered a ‘profit’ under general business terms.

However, the majority of nonprofits don’t rely on selling goods or services to generate an income or profit.

Most rely on the following sources:

  • Donations from ‘for profit’ businesses
  • Donations from the general public
  • Government grants
  • Fundraising events
  • Sponsorship

Individual donations represent the biggest source of funding for nonprofits, making up over 70 percent of all income.

The need for nonprofit organisations to make a profit is further evidenced by the number of additional income generating activities that nonprofits will run every year.

While individual funding remains the biggest income generator for nonprofits, giving has steadily declined across the UK[1]. Between 2016 and 2018, the proportion of people giving money to nonprofits, by donation or sponsorship, declined from 69% to 65%.

To make up ever increasing shortfalls, nonprofit organisations are hosting more and more community-based events, or running national advertising and marketing campaigns – via social media or by setting up a website, to encourage donations, sponsorship and to raise awareness of their organisation.

Some nonprofits set up retail stores, receiving donated items to then sell in order to generate an additional income.

The primary need for a nonprofit to make a profit is to ensure they can build up a reserve fund to ensure sustainability.

What happens if a nonprofit doesn’t make a profit?

Let’s take one of the most crucial nonprofit organisations in Western society, schools.

Government funding for UK schools is declining, if a school didn’t implement its own income generating initiatives, it’s very unlikely that the school could sustain itself.

Can you imagine communities without schools? Think of the knock on effects for society as a whole.

A nonprofit that doesn’t make a profit is unsustainable. If you consider the consequences of nonprofits ceasing to operate across the world, humanitarian, societal and medical crises would deepen overnight.

Take a huge nonprofit organisation like the Red Cross, which provides emergency assistance, disaster relief and disaster preparedness education across the world.

If it stopped making a profit, imagine the crisis if the organisation stopped operating overnight.

There is a myth that most nonprofits are huge and have many resources. Yes, the Red Cross is well known and has resources, but it’s not representative of nonprofits as a whole.

In fact 92% of all nonprofits in the USA have an annual revenue (not profit) of less than $1 million[2].

Nonprofits must make a profit

Ultimately, nonprofits must make a profit not only to remain operational, but to maintain social cohesion.

Most nonprofits are key to building healthy communities by providing critical services that contribute to economic stability and mobility.

Nonprofits contribute to outreach programmes on a local, national and international scale, but they are being asked to do more with less, while needs increase.

A lack of government funding is starving nonprofits of the financial support they need, which is why many are coming up with creative ways to generate an income, including innovative marketing campaigns.

Many nonprofits are on the frontline providing vital services and local, national and international support to vulnerable people.

Profit for a nonprofit organisation serves a mission, which is why any money made over and above operational costs is good for sustainability and fulfilling their mission.

Sources
[1] Charities Aid Foundation May 2019 report
[2] Council of Nonprofits