The Chronicle of Philanthropy has an excellent article about the Nonprofit Business Analysis program offered by the Nonprofit Finance Fund. NFF is run by Clara Miller, a former Tactical Philanthropy Podcast Guest. You can read the full article even if you do not subscribe to the Chronicle by clicking here.
The article looks at how NFF is able to help nonprofits understand how their business model works:
[NFF] has spotted several themes that run through the organizations: Charities can be analyzed according to their “business lines,” growth can be financially devastating to nonprofit groups in the short term, restricted money from grants or an endowment can be a mixed blessing, and spending money on overhead is not necessarily a bad thing.
“If you put a dollar on a child’s forehead, that child will not learn to read. You need something in between,” Ms. Miller says.
That “in between” is what the business-analysis program seeks to understand.
The article points out that the goal of the NFF review is not simply to make a nonprofit “sustainable” or tell them to cut expenses. Instead, it says, “A crucial point of the review is to deduce how the financial structure of a group relates to its mission.”
This connection between the financial structure and mission is the critical element. I think that too many business people who enter the nonprofit field want nonprofits to change their finances to cut “losses”, without understanding how the financials relate to the organizational mission.
On the other hand, it seems to me that too many nonprofits do not understand the critical role that their financial structure plays. Fixing the business model does not mean lowering spending and increasing revenue. Instead, it might be selling real estate and leasing it back to lower operating costs, or borrowing large amounts of money to fuel the grow needed to get to a point where costs are spread across a larger organization.
In the article, the head of one of the nonprofits that hired NFF says, “You can’t run an arts organization by the numbers.” That’s right, you can’t run for-profit businesses “by the numbers” either. Running a great business is not simply about cutting costs and increasing revenue, it is about delivering a good or service that connects with customers in an important way or solves a problem. In other words, running a great for-profit is more about “mission” than it is about crunching the numbers. Is Apple or Google or Starbucks great because they’re the best number crunchers? No. It is because they’ve provided a unique customer experience, solved problems and made their customers happy. They also understand their business model very well, but they don’t run their businesses “by the numbers.”
On November 8 at 1pm eastern, NFF CEO Clara Miller will be the guest on a live Chronicle of Philanthropy online discussion. You can learn more about the program and join in yourself by clicking here. I’ve got it on my calendar.
Sharp analysis, Sean — I really liked the point you made that it’s as important for for-profit organizations to focus on mission as it is for nonprofits.
I look forward to following the 501c Files.