The business side of nonprofits

Editor’s note: Michelle Stockman works with Little Rock-based Arkansas Capital Corp. to promote entrepreneurship development around the state. Stockman earned a bachelor’s degree from Loyola University-Chicago in communications and fine arts, and earned a master’s in entrepreneurship from Western Carolina University. Her thoughts on business success appear each week on The City Wire.

Community service, volunteers, passion, and compassion are some of the words that spring up when thinking about nonprofits. However, there is another side to the nonprofit world that most people forget about.

Nonprofits are businesses.

They need cash flow just like any other business, yet their means of obtaining and accounting for money comes with a different philosophy than our profit generating friends.

While nonprofits can make a profit, the difference lies in where the profit goes once it’s made. For nonprofits, the money needs to remain with the nonprofit at a given percentage. Meanwhile our “for profit” friends typically use the profits to pay dividends to shareholders.

Accountability in accounting and financial reports differs slightly as well, and nonprofits need to obtain an IRS tax declaration of their non-profit status.

How do nonprofits make money? The typical source is through funders. Most organizations will have at least one, preferably more, “sugar daddies” who believe in the cause of the organization to the point where they provide financial donations to the organization. Whether these are individuals or other organizations, the nonprofit gains their operational support often in return for a tax break to the donating entity. Individual donors do not necessarily have to be high-wealth individuals; they just need to have a passion for the same cause as the nonprofit in order to give financially to the organization.

Nonprofits also seek out donations from corporations or foundations. Whether the organization is requesting granola bars from Quaker Oats for a school lunch box program or $5,000 for an event sponsorship, corporations of all shapes and sizes have given of their resources to further assist the communities they do business within. These donations to 501(c)3 classified nonprofits also provide tax deductions back to the corporation.

Lastly, 501(c)3 classified nonprofits qualify for a wide variety of grant programs. (Sorry, but if you do not have a 501(c)3 classification, your organization will not qualify for 99.9% of the available business grants.) From small foundation grants to overwhelming government grants, program specific funding is found through this competitive process that can vary greatly depending on the grantor. Grants are like venture capital; they are competitive, hard to get, time consuming to win yet provide a great source of funds to develop and implement programs that are good for the community.

The balance most nonprofits struggle to overcome involves finances and programs. The two disciplines are very different and both require a lot of time and attention. Developing a good business plan that addresses both issues is a must for the nonprofit to be successful.

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Stockman can be reached at [email protected]