Forprofit versus not-for-profit - Similar but different

 Although there are significant differences between forprofit and not-for-profit entities when it comes to program and financial management, there are many similarities:

First, forprofit delivers goods and services to make money for investors, where not-for- profit is there to deliver a good or service without an expectation of profit. However, they are both being paid for a deliverable, and if they do not meet expectations, payers may send their money elsewhere. Similar...but different.

Second, from a financial management perspective, the requirement for not-for-profit organizations to have subledgers for each program is critical as funders expect you to manage and report on how you use their money; however, in forprofit, many organizations also do this in order to keep track of departmental or customer project costs. Examples include law or accounting firms who keep track of client revenue and expenses, and manufacturing firms who monitor revenue and expenses when constructing a building or piece of equipment. Similar... but different.

Third is deferred revenue, where not-for-profit entities record money received in advance of a project as a liability on their balance sheet versus revenue on the income statement until the funds are utilized; however, this is also practiced in forprofit organizations when a customer provides you a deposit or advance, the amount is credited to an unearned revenue account which is found in the short term liability section of the balance sheet, and once the work is performed, the amount is moved from the deferred account to the revenue section of the income statement. In both sectors, the reason for the deferral is until you either provide the good or service to the customer, it is a liability as you would otherwise owe the money back. Similar... but different.

One major difference between not-for-profit and forprofit, is should the not-for-profit have a net income at the end of the period for a program, they may have to return the remaining unused amount to the funder. Alternatively, you may be permitted to carry all or a portion of unused funding forward to the next period where you may continue delivering the program; for financial reporting purpose, the unused funds would be returned to the unearned revenue section on the balance sheet until such time as it is either returned to the funder or moved back to revenue in the new year when program costs have been incurred. This is very different than forprofit who will either invest the net income in expanding their business or dole it out to investors to spend as they wish.

The concept of returning funds to the donor is different with governments where they are not prepared to return your tax dollars should they have a surplus at year-end. That being said, for government departments, unused funds are returned to the centre and may or may not come back to the department in the new year as what is commonly called a ‘carry forward.’ Be assured though, the actual funder, which is you the taxpayer, is not likely to see the funds returned the odd exception being ‘rebates’ which you sometimes see.

I used to believe the public service was a safe place to work because the funders had lots of money and if they ran out, they just printed more; let’s face it, if the government wants a new toy, they just increase your tax contribution. This being said, when there is a change in government, you may no longer be a priority and could face a reduction in funding. Then when I worked for a not-for-profit organization who was primarily funded by various government entities, I adopted the attitude we are doing them a favour by performing their work, and the money will just keep coming for as long as we want it to. I soon discovered this was not as simple as I thought as like private sector, there is a phenomenon called competition, and it turns out there are others who are willing to do the work if you are not. Similar… but different.

Working for a not-for-profit who performs services for government entities, I also learned there was a significant tie between the cost associated with running the program, and the funder themselves. As the first example, although not government employees, our staff were part of the same union as public servants, and their salaries were negotiated by the same entity who determined much of our service revenues. This meant when there was a salary increase, we then had to request the additional funding from the same entity who approved the increase, as they were also our program funder. Ironically receiving these funds was a challenge and in some cases the funder approached it as though they were doing us a favour by sending the money, when they were the ones who made the decision leading to the additional costs in the first place. Contrast this to private sector and imagine yourself going to a customer and asking them to send more money for the widget they bought from you last year. But remember, in the forprofit sector you negotiate directly with unions, and it was up to you to anticipate the salary increase and prepare for it through means such as adjusting your prices; for us, our prices were set by the funder and only adjusted once the actual need was established. Similar...but different.

Other areas of similarity between all business entities forprofit or not, include salary administration and regulatory obligations. Whether you are processing payroll for a manufacturing firm or for a prison, the concepts will be are the same with perhaps the exception of the bouquet of benefits you offer. In Canada for example, Canada Revenue Agency want their Canada Pension Plan, Employment Insurance, and Income Tax - and the provinces want their Workers Compensation and Employer Health Tax contributions, from all types of business entities including not-for-profit.

As you can appreciate, although there are some differences in financial management of not-for-profit versus forprofit sector organizations, they are similar in many respects. Furthermore, do not underestimate the financial management skills of not-for-profit managers and administrators as these organizations can be complex, and there is nothing simple about fund accountability. Let me draw a bold comparison:

A major hardware and lumber store purchases a box of hammers, enters them into Accounts Payable to pay 30 days later, enters them into their inventory and sales module, and places them on the shelf - from here, you take one off the shelf where you go to the checkout and pay for it. While this is just one of thousands of items in an extremely large building the business owners needed to purchase and maintain, and there are several staff on each shift who need to be paid, this is a straightforward business model.

Now compare this to a social services not-for-profit society who operates 30 different programs for 15 different funders, each with their own agreements, spending rules, reimbursement schedules, reporting requirements including frequency, and treatment of unused funds ranging from return it all to keep a percentage to carry forward for continuing the program next year while returning the difference.

While the first example was 10 time the size of the later, guess which one was more complicated to manage? I will say it again: do not underestimate the financial management skills of not-for-profit managers and administrators.