Nonprofit? What’s That?

I have pretty much worked my entire life in nonprofits. Oh, there have been a few times I worked for for-profit firms, but most likely not much more than 3 or 4 years. And then nonprofit associations within those firms caught my eye and that was it.

An example: credit unions. They are member owned nonprofit cooperative financial institutions. That means they serve their members-owners with financial products and services without concern for making a profit. They are limited by their own size. Small means they are not able to offer a lot of financial services that banks do, unless they cooperate with partners that do so (mortgage partnerships, commercial lending programs, etc.).

And they must make some money if they are to survive. They cannot lose money in any major way repeatedly or they would cease to exist. So, credit unions target a strength benchmark of capital to assets, usually 10% or greater. This ‘owners equity’ figure provides a safety net or nest egg to help the organization weather difficult financial times. Today, the average capital/asset ratio is 9 to 10% for all American credit unions. Banks average 7 to 8%.

Self-serving or not? That is the primary method to determine if an organization is for-profit or nonprofit.

Another difference tells us why these organizations are different.

That difference focuses on purpose. Why an organization exists is important to know. Most businesses exist to provide a product or service which in turn produces profits or return on investment for the owners. This activity also generates jobs and other social benefits, not the least of which is wealth within the community.

Nonprofits, however, are not concerned with financial return as long as it is sufficient to keep the organization running. Their ‘why’ is more complex. It is the Mission of the organization that comes into play.

And focus. What is the purpose of the organization? Example: in the case of the credit union it is to provide financial services for its members. Why? Because financially stable and healthy members benefit the community, the employers in the community, and the institutions, too. Building wealth of whatever size for a person and family creates stability with which to build good lives of promise and depth. That’s the mission of the credit union – to help members create stable financial futures.

Another difference for nonprofits is their vision of the future. If the mission is successful over time, where does that lead the nonprofit organization? In the case of a credit union, 10 or 20 years of success will allow the credit union to grow larger and that means it will be able to offer more services to the membership. What services? Well, things like commercial lending for small businesses run by their members, investment products that help members build retirement savings or education funds for their kids. Or mortgages to buy homes. Small credit unions cannot do this type of work. They can only do so by working with other providers of such products.

So, Mission is Purpose. Vision is dream many years into the future.

Most nonprofits focus on these two important features of their existence.

For-profits, on the other hand,  are usually focused on operating profits. Without them they soon go out of business. But they make profits by doing what? … by providing products and services to people who want or need them. This is a good and productive thing to do. But serving the market quite often is not the focus of the business. Profits are.

I’ve worked for a couple of for-profits. They cared deeply about the social consequences of their products and services. For them, doing business was also a mission for the good of the community.

The major difference, however, is nonprofits exist solely for the purpose of meeting a need of others, not their own needs.

Enough for one posting. More in future blogs!

September 26, 2018