Alligators in the Boardroom and Urban Legends About Nonprofits

Dispelling some of the myths about the nonprofit sector.

An influential but under-the-radar form of popular culture is the urban legend. Like the mythic alligators in the New York sewers or the man who woke up in an ice-filled bathtub without a kidney, nonprofits are the victims of urban myths and legends. Common assumptions — just by being passed along through so many people — gain a measure of credibility just by their frequent telling and longevity. This Board Cafe article may be useful for your fellow board members, your neighbors, and others.

Urban Myth #1: Nonprofits can’t make a profit.

Truth: In fact, the Internal Revenue Service (IRS) guidelines do not say that nonprofits can’t have profits, but they do clearly state that any profits can’t be simply distributed to board members (as corporate profits are to shareholders). The IRS requires surpluses (“profits”) to be reinvested in the organization’s work. Such cash reserves — built through surpluses — are needed by nonprofits to even out their cash flows, to provide reserves for emergencies, and to pay for equipment, research, staff development, building renovations, and other necessary investments.

Urban Myth #2: Nonprofits can’t charge for their services.

Truth: In fact, many nonprofits exist solely or mostly on fees charged, such as nonprofit preschools that charge tuition or community choirs that sell tickets to their concerts.

Urban Myth #3: Nonprofits are poorly managed compared to businesses.

Truth: Compared to which business? Compared to Lehman Brothers, Enron, Merrill Lynch, General Motors, WorldCom? In fact, nonprofits often achieve growth rates well above for-profit companies of comparable size, and they do so while undercapitalized and highly regulated and while maintaining the highest of ethical standards. But comparisons between nonprofits and for-profits often aren’t very useful; they have different bottom lines, different measures of effectiveness, different resources, and different financial flows.

Urban Myth #4: Nonprofits can’t lobby.

Truth: Nonprofits cannot engage in any electoral activity — they can’t support or oppose candidates. However, they can support or oppose ballot measures (such as for public school bonds or against new immigration laws). In addition, nonprofits can encourage legislators to support or oppose various pieces of legislation — as long as such lobbying activities are an “insubstantial” part of their activities. In fact, legislator education and lobbying may be centrally important for long-term impact. (For more information, see the web site of Center for Lobbying in the Public Interest: https://www.councilofnonprofits.org/everyday-advocacy)

Urban Myth #5: A nonprofit budget has to be balanced.

Truth: Instead, in some years a nonprofit will want to budget for surpluses, in order to create a cash reserve or to save up for new equipment. In other years the same nonprofit might plan for a deficit, for example, because the rainy day has arrived, to do a one-time program with windfall money, or to invest in a new fundraising strategy. Over time, the financial goal of a for-profit is to maximize profits; in contrast, the financial goal of a nonprofit is to sustain sufficient working capital for program continuance and strategic choices.

Urban Myth #6: I don’t benefit from nonprofits. Nonprofits help other people.

Truth: each and every one of us benefits from nonprofits every day. We may have a daughter in Brownies or an aging father in a nonprofit nursing home. We may watch public television, take in a play, or take a walk in a restored natural habitat. We drive safer cars because nonprofits have developed and advocated for consumer safety legislation. We benefit from medical research at nonprofit research institutes, and from the cleaner air and water that have resulted from nonprofit advocacy. Nonprofits aren’t about us helping them; nonprofits are the vehicle through which communities organize to help ourselves.

Urban Myth #7: Nonprofits don’t contribute to the economy.

Truth: Surprisingly, nonprofits generate 8 percent of the gross domestic product (GDP) in the United States and employ one in every fourteen American workers. Nonprofits mobilize the efforts of an army: 61.2 million adults volunteering 12.9 billion hours each year toward community and public benefit: the equivalent of 7.6 million full-time staff. (Reference: Nonprofit Almanac 2008)

See also:

• Nonprofit Budgets Have to Balance: False!
• How to Take a Public Policy Stand, with sample criteria
• Sarbanes-Oxley and Nonprofits
• Critical Path for the Boards

You might also like:

• Insider Newsletters: An Easy Way to Keep Your Board in the Loop and Engaged
• Board Horror Stories: How to Reduce Board Resignations
• Rebuilding Nonprofit Boards: When a New Board Can Be a Fresh Start
• Five Lessons for Creating an Effective (and Accountable) Nonprofit Board
• A Cautionary Tale: Overcoming Governance Nightmares in Nonprofit Organizations

 

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