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Can a Nonprofit Make a Profit?

best practices board finances foundation reporting Dec 29, 2022

Can a Nonprofit Make a Profit?

The answer is yes, and it is actually necessary that they do. One reason is because a nonprofit needs operating reserves, and if you don't have a year in which your income exceeds your expenses, you'll never grow that operating reserve. (Click here to read my recent post about how much a nonprofit should have in reserves) So why is the term nonprofit used? Well, it's a statement that individuals cannot personally profit or “benefit” from the organization's activities. 

Guidelines for thee Use of Profit Within a Nonprofit

Now that we’ve established that making a profit is not only allowed, but also necessary, let’s look at a few common guidelines regarding how that profit can be used: 

  1.  Board members cannot be paid for their service on the board.
  2.  Compensation for the nonprofit’s top executive should be determined by an independent committee and supported by market research and comparable rates of compensation. In addition, any family member of the top executive who is also employed by the nonprofit should have their salary determined by an independent committee using similar market analysis. 
  3.  Annual profits cannot be distributed to nonprofit employees in the same way that a for-profit company might distribute them.  For example, in a for-profit company, it's not uncommon for the owners to distribute a 5% bonus if they see a 5% increase in profit. Well, in a nonprofit, you cannot do that. With that said, if you have an increase in giving or income in a year when you weren’t able to offer the salary increases you had planned, then it’s certainly an opportunity for your board to look at whether bonuses are appropriate. But in this case, a bonus would be more of a big-picture board decision than a directly correlated percentage of your annual profit. 
  4.  Finally, it’s unethical to tie the compensation of a fundraising position to the amount of money they raise. I know, this doesn’t make sense in today’s for-profit, commission-oriented world. Shouldn’t we reward someone for doing their job effectively? The problem is, this creates a conflict of interest when the person asking the donor for the gift is also benefiting from that gift because ultimately, a portion of it is going back to them personally. So how do you structure this person’s compensation?  Well, you want to set a salary for your fundraising position that is based on market research and reflects the role and responsibilities of the position. Naturally, someone in an organization raising $100,000 would be paid less than someone in an organization raising $1,000,000. Obviously, this salary can fluctuate generally with the expected amount of funds raised, but it should not be a direct percentage like a commission. 

Thriving Financially in 2023

     Ass we wrap up this year, my prayer is that you would end the year in abundance! I'm praying for favor on your mission. I'm praying that you would have everything you need to continue to do the work coming into the new year, and I want you to know that I'm here for you!  

     Next year, I'll be offering another live session of my Financially Thriving Nonprofit course. It's where I have the opportunity to distill my 25+ years of experience in the nonprofit financial arena into very actionable and helpful tools that will be a blessing to executives, board members, or financial staff members.  I hope you'll consider joining me for my next course this year. Click here to learn more and sign up. I look forward to supporting and serving you with more helpful content each week!

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