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Jul 17, 2012

What Nonprofits Envy About For-profits

The Readers of the Nonprofit Quarterly LinkedIn discussion group asked what we envy about for-profit organizations. From the nonprofit perspective, I envy the for-profit’s flexibility in finance. All money is fungible. Restrictions on use of grants and gifts is a major source of inefficiency and mission drift among nonprofits. I also envy for-profits’ wider range of capitalization. Nonprofits are stuck in having costly and time-consuming capital campaigns or very slow accumulation of reserves in order to finance expansion, plus bank loans IF they can get them. For-profits have equity, which gives them an additional investment source that nonprofits cannot have. As a result, the capital structure of nonprofits is suboptimal and often compromises their effectiveness and efficiency.

A great primer on this problem is Clara Miller’s spring 2003 article in Nonprofit Quarterly, understanding nonprofit capital structure.   Be sure to read the sections on Financial Management and Challenges in Philanthropy in More Than Just Money (pp.57-104, 157-200).  As Gordon Gee, President of The Ohio State University, said in the introduction to the book, “I found the chapter on philanthropy particularly provocative.  In that section, Allen describes the pressing need for leaders of  nonprofits to help donors understand that unrestricted gifts carry more power to advance missions and priorities than do narrowly defined gifts.”