Profit’s not a dirty word for not-for-profits

Posted on 11 Sep 2024

By Greg Thom, journalist, Institute of Community Directors Australia

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A leading not-for-profit (NFP) finance expert has urged NFPs and charities to rethink their views on profitability.

The Centre for Public Value’s Professor David Gilchrist said rather than feeling guilty about profitability, for-purpose organisations should embrace it.

“Not-for-profit organisations and charitable organisations are entitled to create a profit, and I would argue, in fact, that they need to create a profit in order to be sustainable in a markets-based economy,” he said.

Speaking during a webinar as part of the Institute of Community Directors Not-for-profit Finance Week, Professor Gilchrist said making a profit meant NFPs were building the balance sheets of their organisations, ensuring they remained solvent in the short term.

“In the medium term, to be able to respond to strategic and other implications for the environment in which you're operating, particularly where government and others might change policy frameworks and so on, you have to invest.

“In the longer term, those profits are used to replace assets, and increasingly the dollars for philanthropic donations of assets as well as lottery systems assets donations are becoming harder and harder to get.

“So, to that extent, I think it's really important not only that your organisation makes a profit, but it has an appreciation of the level of finances required in order to ensure sustainability of the organisation in the short, medium and longer terms.”

Professor Gilchrist said he did not think the sector had done itself any favours by advocating for surpluses and deficits.

“I think there are a lot of people, particularly not engaged in the sector, that would say things like, ‘Well, not-for-profits aren't supposed to make money,’ which means that at the end of the day, they're not going to be financially sustainable.”

The Centre for Public Value's Professor David Gilchrist.

He said in accounting terms, a profit is not the same as a surplus.

“A profit is a reinvestment in the balance sheet and builds the wealth of the organisation to be able to maintain that sustainability in the short and medium and longer terms.

“A surplus, on the other hand, is really saying that you are not needing the money that you've generated, that that money is extra to what is required by the organisation.”

The Centre for Public Value's Professor David Gilchrist.

Professor Gilchrist said this definiton of surplus was an old one that dated back more than a century, when charities and not-for-profits were largely trusts, and was long overdue for an update.

“I think we need to change that perspective, and I think we need to talk about profits because it is fantastic for charities and not-for-profits to make profits.

“I think there are a lot of people, particularly not engaged in the sector, that would say things like, ‘Well, not-for-profits aren't supposed to make money,’ which means that at the end of the day, they're not going to be financially sustainable.”

No limits on profitability

Professor Gilchrist stressed that there should be no cap on the level of profitability for NFPs or charities, as long as they could not distribute profits or net assets upon termination.

“Beyond that, they can be as profitable as they possibly can be, and my view is that you should be as profitable as possible with the remit of pursuing the mission of the organisation.”

Closing the funding gap

Professor Gilchrist said when it came to the question of how much cash an organisation should keep in reserve in order to fulfil its mission, it was important to acknowledge that underfunding is a fact of life for the sector.

“It's my experience that government funding, particularly for services procured, is never sufficient to cover what we call a comprehensive cost of service delivery.”

This meant NFPs and charities must have a good understanding of their own organisations' costs – from human resources and administration to the delivery of frontline services – so they could identify any gap in funding.

“Often organisations are able to maintain their solvency through funding arrangements, but they're not able to respond to policy changes, not able to reinvest in the organisation to train staff,” said Professor Gilchrist.

This could result in a significant gap in technology capability and capacity for important tasks such as performance reporting.

“Everyone's talking about how not-for-profits and charities need to report on their performance and their impact,” said Professor Gilchrist.

“All of that costs money and all of that money needs to come out of the profit generated by the organisation.”

Watch the full webinar featuring Professor David Gilchrist here

This article first appeared in Community Directors Intelligence, the newsletter for not-for-profit leaders.