When Charity Shouldn’t Act Like a Business

“Nonprofits should be more like business.” It’s a headline that is increasingly seen atop newspaper editorials and articles in business journals. The concept is simple. If nonprofit organizations would simply act more like for-profit businesses, they’d do a better job serving the community.

There is a certain amount of truth to this belief. Indeed, good charities already incorporate many “business practices” into their work. While they may be nonprofits, these organizations are in fact businesses too. In Door County, many of our local charities have done an effective job applying business techniques to their work. Several examples were highlighted a few years ago in “The Business of Charity” in the Peninsula Pulse.

Unfortunately, if you read some recent editorials, the desire to apply every for-profit efficiency to the charitable world is becoming an unhealthy obsession. There are real and fundamental differences between private businesses and public charities. As a result, some practices just don’t translate very well. As Shakespeare pointed out, it’s possible to have too much of a good thing.

Large charitable gifts often come with restrictions.

Imagine for a moment that you’re a homebuilder. A wealthy couple has a vision for a beautiful new house up on the bluff and they’re ready to hand you a giant check so that their dream home can become a reality. You’re elated because building houses is what you do best and you know this new customer will be ecstatic with the results of your labor.

Just as the couple is writing out their check, they tell you that none of their money is to be used for “administration.” The husband says that he doesn’t want any portion of his check to pay for your company’s electric bills, salaries for your accounting staff, or for your marketing efforts to bring in future customers. Similarly, the wife insists that they will only pay for the building supplies and laborers that work directly on their home. None of their money is to be used on the overhead and administrative costs that are an essential part of operating your business.

There is not a single for-profit business in the country that could survive very long operating under these kinds restrictions. Yet this is what we expect of charities every day.

When the private business wants to make investments in its own administrative and operational infrastructure in order to maximize efficiencies, it simply does it if the numbers make good business sense. However, the charities of the world face restrictions placed upon them by their donors. Those restrictions, both explicit and implicit, inherently limit what a nonprofit organization is able to spend on its own operations regardless of the wisdom of the decision.

An increase in customers often costs a charity money.

Now envision that you decided to open a new restaurant. You’ve got one heck of a chef who makes the best burger in town. Every time you sell a burger, you make a little money. As word gets around, demand goes through the roof. With the increase in volume, you’re able to realize efficiencies in your production and service. Hence, your cost per burger goes down and your net revenue from each burger goes up. Every new satisfied customer directly results in more money for your restaurant.

That’s the quintessential story of American business success. At least it is in the for-profit world. It’s not that simple if you’re running a free nonprofit afterschool program like the Boys & Girls Club.

Similar to the restaurant, the afterschool program wants more satisfied kids to keep coming back through the door. Thus the organization does its best to make the children feel welcome. It provides safe recreational activities and quality educational opportunities. We see an afterschool program overflowing with happy and engaged kids and we correctly judge it a success.

Indeed, it is a success. Yet that is the unique challenge of the nonprofit world. A successful program often results in more work to do without any more money to pay for it. Both the for-profit and the nonprofit business often want to serve more people, but in the former, more customers usually translate into more money. In the latter, serving more people often results only in more work, not more revenue. The truth is that every new child who walks through the door of the free afterschool program isn’t a revenue generator, it’s a cost center.

The person paying for the service is often not the one receiving it.

Whether you’re a couple paying a homebuilder to construct your dream home, or just a guy who wants a good burger, normally the person paying for the service is also the one who is receiving it. Of course, there are some exceptions in the for-profit world, such as health care, but does anyone want to argue that the health insurance system in the United States is an example of best business practices?

In a for-profit business, the customer pays for a service they ask for. Yet rarely in the nonprofit world does the user of the service actually pay full price for the service they receive, if they pay anything at all. In the case of many afterschool programs, it’s free or virtually free. The charity’s cost to deliver the service must be paid for by the organization’s donors.

The same holds true even when you’re paying for admission to see a show at most performing arts venues. When you buy a ticket to a show at the Peninsula Players, the Fox Cities Performing Arts Center, or even the Kennedy Center in Washington DC, you’re receiving a charitable subsidy. Each one of these venues and the overwhelming majority of performing arts centers across the country are charities. The face value of the ticket is insufficient to cover all the operating costs of these nonprofit organizations. Hence, donors are needed to subsidize what the price of admission does not cover.

Thus, we need to be thoughtful and deliberate when applying for-profit business practices to the nonprofit world. There is a lot that charities can learn from their for-profit counterparts. However, there is a reason these are nonprofit organizations – because there is no profit to be made. Not every business practice is applicable to the unique mission-driven charitable world.

This column by Bret Bicoy originally appeared in the Peninsula Pulse on February 5, 2016.

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