The Mighty Blog

The Place for Profit in a Nonprofit world

Gary Romano
Posted by Gary Romano on Mar 5, 2019 8:47:00 AM

It’s time we talked about one of the taboo topics of the nonprofit world: the topic of “profit.” One thing I have learned over my career is that if you’re going to have a viable organization, you’ll need to get used to the word. In fact, this is one of the most important concepts that everyone in the organization, regardless of their role, needs to consider in their decision-making process.

Let’s be clear—profit is not evil but an important part of your business model. Profit is just the difference between what customers are paying you and what it costs you to serve them. For example, if a client pays you $100,000 and it costs you $80,000 to do the project, your profit is $20,000.

That difference, in this case $20,000, fuels key elements of your business model, including:bigstock-Finance-Report-Concept-Flat-S-124822064

  • Sales and marketing/resource development to bring in other projects.
  • Capital investments, from a new computer to a new facility.
  • Research and development of novel services to meet consumers’ needs.
  • Underwriting leadership and other “overhead” functions that provide a shared organizational benefit.
  • Subsidizing projects where the costs exceed the revenue available.
  • Mitigating the impact of unforeseen events.

In short, without profit, your organization can atrophy and implode. Profit is not the enemy; it’s your best friend.

NET VS GROSS PROFIT

There are two types of profit you should be thinking about. Gross profit is the difference between your revenue for a given project and the costs involved in delivering it. For example, a foundation is paying you $50,000 to develop a community plan. The $50,000 is your revenue. But your organization doesn’t have free reign with that money—you have to produce the community plan. These costs include direct costs (such as the staff time to hold community focus groups) as well as indirect costs, shared by the whole organization (for example, a part of the cost for the office space used by the agency or the salary of the Executive Director). Let’s say the total cost to develop the community plan (including staff time, printing, overhead costs, etc.) is $45,000. The difference between revenue and cost is the gross profit; in this case, $5,000 (i.e., $50,000-$45,000 = $5,000).

In contrast, Net profit is the total revenue and costs associated with the entire organization. That is, when you take all of the various revenue sources and take away all agency costs, the net profit is what remains. For example, if the total revenue for an organization is $320,000 and the costs are $300,000 the net profit is $20,000.

PROFIT COMES IN TWO COLORS: RED AND BLACK

When you hear about profit being in the black, it means it is positive. That is, you are bringing in more money than you are spending to deliver the given service or product. However, profit isn’t always going to be positive, and this should be a great concern to you. A negative profit margin means you’re actually losing money on your products or services, which can be the fastest way to have to close your doors. Accordingly, leaders, managers, and staff should be ever vigilant of their profit margins to ensure they continue to be in the black and your organization continues to have the anticipated impact.

WHAT IS PROFIT TELLING YOU?

Both gross and net profit, and whether they are in the black or red, tell you very different things about your operations. Gross profit indicates the profitability of a given project. For example, in the table below, Project 3 is highly profitable, while Project 2 is having some challenges. There are many potential reasons why these projects are turning a profit or not, and managers should work to understand why this is the case.

In contrast, the net profit shows you how the organization is doing overall. In this case (and many times in practice), the net profit can mask a problem (such as the cost overrun in Project 2). Conversely, when the net profit is negative, every project may have a positive gross profit (indicating there are challenges with organization-wide costs).

Area

Revenue

Cost 

Profit

Project 1

$50,000

$45,000

$5,000

Project 2

$100,000

$110,000

-$10,000

Project 3

$150,000

$140,000

$10,000

Other revenue and costs

$20,000

$5,000

$15,000

Total

$320,000

$300,000

$20,000

Profit is one metric for any organization; however, it should not be considered the only driving metric. Operational, programmatic, and community impact are also important considerations when evaluating projects, resources, and growth. Funding and its availability is an essential component for decisions; however, in mission-driven projects, a profit on one project can help offset funding deficits on an important initiative that may forecast a loss. How important is an anticipated profit in your decision to green light a much-needed project or resource for your stakeholders?

Please reach out and book a time to talk about this post or any of the topics from The Mighty Blog!  

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Topics: Coaching, nonprofit, What every CEO and ED should know, fundraising, strategy, business models

Gary Romano

Written by Gary Romano

Gary Romano is an award-winning strategist, author, and advisor for nonprofit leaders and entrepreneurs whose work has helped grow national and regional organizations, move startups to stable state, and bring new ideas to market. He is the published author of two books, Small But Mighty, which is helping entrepreneurs to launch and grow nonprofit consultancies, and Lean Recruitment, an innovative system to cost-effectively recruit talent. Gary is a SHRM Certified Senior Professional and has a Master’s in Urban Affairs and Planning and a Bachelor’s in Political Science. Gary is a history buff with multiple published magazine articles on ancient strategy and an ever-growing collection of Greek and Roman coins.

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