14
Mar
13

Revenue: A ‘means’ or an ‘ends’ for Nonprofits?

In for-profit corporations, the ultimate goal of the company is clear – maximize bottom line profits. This is what the shareholders want and expect, and there are laws that protect and prioritize the goal of profit.

As a young auditor in the for-profit environment, I was taught to be wary of the quest for the bottom line and potentially damaging behaviors if the bottom line was pursued ‘at all costs’. These behaviors included the potential for financial statement manipulation through the use of aggressive estimates, off-balance sheet accounts, and manipulating the timing of accounting entries.

In the nonprofit world, the ultimate goal is not the pursuit of bottom line profits. The goal or mission of the nonprofit is communicated through its mission statement and this is the ‘end’ reason why the nonprofit exists. For World Vision, our mission is to provide the opportunity for life in all its fullness for the children we serve. Our secondary mission is to create an environment where our donors have and act upon the desire to give children the opportunity for life in all its fullness. For nonprofits, bottom line excess (we don’t call it profit because nonprofits by their nature and name are not in pursuit of profits) is a means to fulfilling the mission, not the end mission itself.

However, in nonprofits, the risk of prioritizing the bottom line over the mission can exist. Although nonprofits might not intentionally be acting in this way, decision making can favor the bottom line over mission if clear decision making criteria have not been established. When there are multiple priorities and multiple ‘good things’ to pursue, it is possible to favor decisions that increase the bottom line because this goal is very tangible and quantitative. A mission or program impact goal is often not very tangible or quantitative. Additionally, mission and impact goals are long term goals that might not show markable progress in the short term.

Here are some scenarios that can create the danger of sacrificing the mission for the sake of the bottom line:

-Cash revenue when accepted too fast for programs to absorb,

-Cash revenue when accepted for a purpose different than the assistance truly needed by programs,

-Acceptance of gifts of property when there is more cost than benefit (e.g. property with high hidden liabilities, property that is difficult to liquidate, etc) to the gift,

-In Kind Gifts that cannot be well integrated with programs, and

-Cost cutting of necessary infrastructure to preserve net income in the short run.

I read an excellent article in the January/February 2013 HBR issue. This article highlighted Jeff Bezos as one of the top CEOs in the world. In the article, Mr. Bezos was questioned about Amazon’s strategy specific to maintaining shareholder value and having a long term perspective. This was his answer.

“If you’re long-term oriented, customer interests and shareholder interests are aligned. In the short-term, that’s not always the case. We have other stakeholders, too – our employees, our vendors. We take it as an article of faith that if we put customers first, other stakeholders will also benefitas long as they’re willing to take the long-term view. And a long-term view is essential for invention, because you’re going to have a lot of failures along the way”

His answer reflects Amazon’s philosophy of basing decision making on the long term goal and of keeping their main stakeholder – their customer – as their primary focus. To Mr. Bezos, this mentality was in the best interests of all their stakeholders, including their shareholders over the long term.

What of our nonprofits? Are we maintaining focus on our key stakeholder and are we keeping the long term in view?

How are we balancing short term and long term goals? Management lives under the reality that they are measured by that which is measurable, which typically is financial results. How do we balance the goals that are measurable with the more important goals which are often hard to measure?

World Vision has taken a good step in the direction of measuring ‘mission’ or impact. See this related post.

If nonprofits are honest about wanting to focus on keeping the main thing the main thing, we need to make visible our progress towards the big goals of mission impact alongside financial and revenue results. When our goals are balanced, we are able to more clearly see the trade-offs between goals when critical decisions are on the table and need to be made.

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