Finance in Non-profit Organizations

Elizabeth Searing is an Assistant Professor at the State University of New York at Albany. In this video excerpt, Searing explains the benefit theory of nonprofit finance and the relation between the type of goods or services you’re offering and the ideal type of funding it.

For Searing, there is no ideal mix of financial sources because the financial portfolio is always going to be dependent on the types of services one provides and the ecosystem one is situated in. But it is advisable not to concentrate on one particular source. Earned revenues are important if, for instance, government funding is missing. These revenues are also less restrictive: When selling T-shirts, an organization is free to use that money for any purpose. For Searing, it is always good advice to have this option in the income portfolio compared to money with specific usage restrictions. Thus, it is always a kind of ‘individual diet’ which is going to vary depending on each organization.

When it comes to financing in nonprofit and for-profit organizations, there are four major differences, according to Searing:

1. First of all, for nonprofit organizations, there is a huge variety of different types of financial sources, eg government grants, foundation money, individual donations, or even earned revenues – for example, when an organization sells products. In comparison, the financing in for-profit organizations is more straightforward, dependent on the market and private investment.
2. Secondly, handling markets and private investors is a lot easier for for-profits. An example Searing provides is: someone buys a cheeseburger for $3 US in McDonalds. In nonprofit finance, this person is likely to add: ‘You can only use this money to buy meat, but not for the salaries of the managers and any other administrative expenses.’ This kind of donor stipulation is very common in nonprofits, but not in for-profits.
3. When it comes to nonprofit organizations, in many countries – especially Germany, Italy, England, and the US – there is a certain ‘asset lock’. It is not possible to tempt investors by offering them ownership of parts of the company because they are publicly owned. The fact that there are no technical owners makes it more difficult to raise capital for nonprofits compared to for-profit organizations.
4. Last but not least, the incentives when trying to convince someone to invest in a nonprofit or a for-profit organization are different. For nonprofits, it is more difficult, since they have to pull on both the business and the charity side. And the task of explaining that money is needed to start off is not the easiest for a nonprofit, whereas for the for-profit it is only the business side, meaning profit maximization, they can concentrate on.