Why not-for-profits need to think like companies

There are approximately 200,000 not-for-profits (NFPs) in Australia. Some are micro-entities, while others employ thousands of staff; some are unincorporated, while others are registered industrial organisations or charities. Regardless of their size or form, all NFPs have one thing in common – they pay no dividends. This is a blessing as it enables NFPs to reinvest their funds, but it can also be a curse, causing directors and managers to develop a more relaxed attitude towards the management of staff and funds.

Aim to run a surplus

It doesn’t matter whether you are running a peak industry body, charity for disabled athletes, bus drivers’ trade union or local cricket club – all NFPs are engaged in business. Regardless of its mission or articles of association, at the core of every business is the desire to increase value. In private companies this is called profit, but for NFP purposes it’s called a surplus – they mean exactly the same thing.

Many NFP managers say they aim to run a balanced budget. This is the wrong approach. If all you do is run balanced budgets you would halve the real value of your organisation’s funds by 50 per cent within 24 years (assuming inflation is always three per cent). Every NFP should aim to run a surplus of no less than the bond rate (as a percentage of total equity) or it is destroying value.

Don’t accept bludgers

NFP executives shouldn’t treat their staff any differently to how they would be treated in the for-profit world. Working for a NFP organisation doesn’t give people the right to under perform.

NFP employees need to have clear key performance indicators and be measured against them. They should be coached and disciplined, and if they aren’t meeting expectations the organisation must be prepared to terminate them. You are destroying the value of your organisation if you don’t take this attitude.

Reconsider staff structure

Several years ago, a NFP created minor waves in the media when the boss ‘fired’ a handful of volunteers. The conventional wisdom at the time was that the organisation was silly to now be paying wages where others used to provide their services for free. The truth, however, was that the performance of the organisation thereafter paid for the cost of the new employees several times over.

Elect leaders who care

The attitude of a NFP officer or director shouldn’t be any different from people who run companies. All too often there is an attitude among NFP leaders that ‘I wouldn’t put up with this in my own business, but this is just a NFP’. Attitudes are infectious and having a NFP officer, director or board member who doesn’t take their role seriously can undermine the value of your organisation.

Invest wisely

Another common error made by NFPs is to assume that their NFP status entitles them to invest money in projects that don’t align directly with their organisation’s objectives.

For example, one association I recently came across is operating an expensive school for disabled children in a city far away from its member base. Apart from being a nice public relations exercise, the members derive virtually no benefit from the project. So why is this NFP running the school? Apparently someone long ago thought it was a good idea and no one has had the courage to pull the pin on the project since. The result has been to destroy the organisation’s value and waste members’ funds.

The successful operation of NFPs ultimately comes down to attitude. Officers and directors must ignore their organisations’ status as a NFP and carry on as though they were in the private sector. When making decisions, NFPs must ask themselves ‘Would I do this with my own money?’ If the answer is ‘no’, don’t do it.