Monday, November 18, 2013

Nonprofits aren't businesses. Really?

Every once and a while I see someone railing against the idea that nonprofits should be managed much like their for-profit counterparts. After all, nonprofit staff can and actually should work for peanuts, right? All supplies will be donated, all services will be free, and the quality of their programs will still be top-notch.

If only it was that simple.

This morning I was forwarded a link to a nonprofit asking for contract grant writing services. The ad sounded great. 21-year old community healthcare nonprofit, multi-million dollar revenues, offering a long-term contract with a somewhat reasonable budget range for grant writing services.

However, upon looking up their 990 history, I could see why they were looking for grant money. Over the past five years this nonprofit showed steadily declining income. Nearly their entire revenue stream was based on one source of income, i.e. government payments for services. Those payments had dropped by almost 30% in that same five-year time frame. In the meantime their payroll costs had gone up by almost the same amount as a percentage of income. In 2012, they posted their first loss ever and it was in the mid-six figure range.

Healthcare is a very labor and supply-intensive field. Good help does cost real money, supplies are not free, the utilities still have to be paid with real money, and being a nonprofit doesn't change that.

You can see where this nonprofit is going. Newly mandated increased costs for healthcare and the natural progression of increasing salaries as employees stayed in place longer and improved their skills was pushing them over the edge. In their entire 21-year history, they had raised less than one million dollars in funding not related to the provider payments from the government. 82% of their income was now going to employee-related expense. Even in healthcare, that's out of line.

Nonprofits are not immune to market forces or economic reality. If your costs of operation outstrip your income, you are going down the tubes, no matter how big or small you are.

I don't know exactly what happened to this nonprofit. Maybe their patient days went down, maybe the provider payments were less than previously received for services, maybe the employees were asking for unreasonably high salaries or the perks had gotten out of hand. Who knows? The point is, their trend line was obviously going the wrong way, and they waited too long to try to address it. Now they are operating in the red, and that means they are unlikely to be considered for grant funding.

If they survive it won't be due to hiring a grant writer. It will be because they get a hard-nosed business management consultant in there that can get their business operations back on track. That's where they should be spending their remaining dollars.

There is no doubt that there are real differences between the motivations and goals of nonprofits vs. for-profits and that is as it should be. I addressed that in another post. Still, whether you like it or not, the nuts and bolts of accomplishing  the end result are pretty much governed by the same realities. Ignore that at your peril. 

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