Serving the public is a business

 The nonprofit and public service sectors are often misunderstood when it comes to their place in the business world and the transferability of the skills of those who work in the industry.

When most people think of the term ‘business’ they associate it with buying, making, or doing something with the intention of selling it and turning a profit which they will either reinvest into another earning endeavor, or spend on either a life sustaining need, or a frivolous want. Businesses normally require an investor of sorts who uses either their own money or that of others, to purchase the necessary infrastructure and materials, and hope it ends well otherwise they are in trouble.

However, there is another type of business which although does not include an investor who aims to earn a profit, still participates in making or doing something, the activities of which have financial implications. This is the nonprofit and public sector. 

So, why do I consider nonprofit a ‘business?’ Simple: we borrow funds to buy a building and equipment, hire staff, solicit our services, compete with similar agencies for contracts, hire staff to deliver goods or services, and if we do not deliver, we are replaced, and Directors still owe the lenders. Sound familiar?

As an example, our nonprofit organization is funded primarily through service contracts, mostly with provincial government departments or agencies, and the terms and conditions include specific deliverables in exchange for a given price. Although various form titles are thrown around such as grants, contributions, and funding arrangements, in the end they all have terms and conditions with a funds in exchange for something component, which means they are contracts. For those who say different, try and find a solid definition of each of the above terms, then show me an agreement using one of the above terms which actually follows the said definition to the exact. Case in point: most definitions of a ‘grant’ indicate no financial reporting requirements as long as the service is delivered; yet I can show you a ‘grant’ where you have to account for every penny including providing receipts. This is merely one simple example.

Regarding competition, most of our service contracts are for a given period of time and are re-solicited at expiration; in many cases, there are other service providers who compete on these advertisements, and if we do not win the bid, we are either looking for other opportunities, or sending staff home with a separation slip. Does this sound familiar?

Now that I have established the myth of nonprofit not being a business, let me dispell another, which is it is simple; I will do so with an illustration:

A large retail hardware and material store has many locations each of which are the size of a city block; they may be large, and there may be a substantial investment, but they are not complicated. You purchase a box of 24 hammers, you enter them into inventory and place them on the shelf, you send the vendor invoice to accounts payable who pay it 30 days later. Next, a customer selects the hammer along with a few other items then making their way to the till, they pay for the items, the money is deposited into the company bank account, and you do it all over again. Simple. Big, but simple. Yes, your investment is high, competition fierce and your volume must be sufficient to provide adequate return. Big, but still simple.

A nonprofit organization employs 100 staff delivering 30 different programs which although grouped into different general themes, each are unique in they have different funders who have specified expectations including deliverables, measurements of achievement, and operational and financial reporting requirements. Some programs provide an annual payment up front, others quarterly, a few monthly, a couple twice per year, and one reimburses your first claim after 2 months, the second after another 2, the third after 4, and the final after the last 4. For reporting on use of funds, some provide spreadsheet templates, others use portals, some monthly, others quarterly, and a few annual. Other terms which vary include this one allows 10% for administration where another 12%, this one only gives you 5% but wants accounting and human resources staff included with program delivery, this one provides general liability insurance, that one expects you to purchase your own (explain to your agent you want this group of staff covered but not those ones over there.) Finally there is accommodation: in some cases leased space is program delivery, others administrative; in addition to this, some funders recognize staff require a work space, others expect you to find a corner for them to work from.

What I have described is a complex nonprofit organization where there are others which are simple. For example a hockey or baseball club will generally have one source of revenue with multiple associated expenses; exceptions may include special events such as tournaments. In addition to this, organizations may have competition in members can choose to join other clubs, or yours may be the only one in the area, or otherwise have some sort of exclusivity. 

Another example is professional associations such as law societies or accounting associations; these organizations generally have one source of revenue and exclusivity in members either join them or do not work in their profession, which means the cost of joining and how funds are spent are out of the member´s control.

In summary, as long as you are being paid for a deliverable and other organizations are lined up to replace you, it is a business regardless of lack of an investor. Furthermore, depending on your specific area of service, managing a nonprofit organization can be extremely complex; with this, do not underestimate the management skills of those who do it.

My book: Means to an end Inverted - Financial Management of Nonprofit and Public Service Organizations, will tell you more. Follow me for updates.