For-profit or not-for-profit? Is that the question? Perhaps not!
All organisations need to make a profit over a sustained period. Without profit, an organisation will be restricted, and eventually cease. We’d probably laugh if we called organisation ‘For-Loss’ or ‘For-Breakeven-Only’.
A more relevant question is: ‘How should organisations distribute profit?’
This is an important question which impacts millions of Australians. At least 10% of Australian organisations are not-for-profit (NFP). That’s at least 250,000 NFPs! If each of these organisations positively impacts just 10 people per year, that would mean 2,500,000 people would benefit.
The real numbers are much higher!
How different are NFPs really?
On the surface the difference between For-Profit and NFP appears obvious.
“Not-for-profit (NFP) organisations are organisations that provide services to the community and do not operate to make a profit for its members (or shareholders, if applicable).” (ATO)
- However, all organisations need to:
- Invest in people
- Improve capabilities
- Improve the customer experience
And these ultimately requires profit. Profit enables the following outcomes to be achieved:
- Increasing efficiency and profit margins
- Maximising impact
- Enable growth
In fact, NFPs may have an advantage over other organisations. Their profits are retained rather than distributed as shareholder dividends. Business leaders within NFPs may understand this and focus on social impact. However, an insufficient number of NFP employees appreciate this.
The following diagram highlights the differences between ‘For-Profit’ and ‘NFP’ organisations. Depicted in this way, similarities are emphasized rather than differences.
A New Perspective is Needed
Simon Sinek encourages us to adopt the terminology ‘For-Impact Organisation’ and to recognise that businesses don’t exist to make money. Instead, they exist to accomplish something, to advance a greater cause, to contribute to society. Money is fuel to any organisation – whatever their tax delineation.
Sinek also highlights that shareholder supremacy, short-termism, and high incentives for executives are more recent phenomenon which undermine organisations and their impact.
So, what can organisations learn from all this?
For-Profits can learn to:
- Increase retained earnings until their customers and staff receive outstanding value
- Rationalise dividends
- Set reasonable executive salaries
- Appreciate that organisations exist to contribute
Not-For-Profits can learn to:
- Maximise the value delivered by improvements
- Think more in-terms of return on investment and profitability
- Leverage partnerships rather than simply competing
- Leverage product management
- Invest in technology
Government executives and staff can become more effective with:
- Recognising the importance of building the bottom line of NFPs
The diagram below highlights a new focus for NFPs/For-Impact and For-Profits.