Three Reasons Nonprofits Can't Act Like Businesses

I've been working in the nonprofit sector long enough to observe a special brand of dysfunction that seems unique to the field. For awhile I just thought I worked for crazy people (which may be true), but I'm also realizing that their hands are tied when it comes to borrowing business principles that could make nonprofits more effective. Here's the top three reasons they can’t:

Number 1: The IRS
I recently co-founded the nonprofit Project LACE and on our initial application to the IRS for tax-exempt status I made a mistake; I showed a positive balance on our projected budget at the end of the year. Yes, that was a mistake. I just thought the nonprofits I previously worked for didn't know how to save money for a rainy day. I didn't realize the IRS prevents them from doing so. There is no permission for long-term financial planning (unless you are lucky enough to have an endowment). That's insane.

Number 2: Puritans
I just finished reading Dan Pallota's book Uncharitable: How Restraints on Nonprofits Undermine Their Potential. He illustrates that nonprofit ideology is based on a Puritan mindset which encouraged making lots of money in business. The catch was, you had to feel guilty, give some of your money to the poor, and then you could feel good about it. However, if you chose a life of service to the church, for example, there was no room for selfish interests and sacrifice was the only penance you could pay for being born a sinner (because people, according to the Puritans are inherently evil). Pallotta argues that someone can sell expensive sneakers to poor kids in the ghetto, for example, turn around and give some of that money away to a children's charity, and be a hero. But if you choose to dedicate your life to charity, the only way you can be a hero is by sacrificing your interests and having a "missionary spirit" which basically means that you work for close to free. That creates burnout and does not attract top talent to nonprofits.

Number 3: Donors
Donors are not to blame but they have been trained by the IRS, Puritan-based culture, and other charity watchdog organizations to evaluate nonprofits' effectiveness based on the percentage of money that is used for programs versus what is used for administrative and fundraising expenses. The result is that nonprofits can’t invest in infrastructure. I know of one that has been in operation for 14 years without a functional donor database! If they had one, they could potentially grow beyond the paycheck-paycheck poverty mentality that has become their culture. This is a nasty cycle and it must be stopped.

What We Need
There's a lot more to the argument and I welcome comments from everyone. I also recommend Pallotta's book for a broader overview but these are the top three that nag at me every morning. What we need is a philosophy that cares less about how things get done and more about whether or not something is accomplished through the efforts. We need to allow nonprofits the tools for successful long-term financial planning, access to top talent pool through financial incentives, and investment in infrastructure. And we need to ask ourselves: do we want to manage problems (temporary homeless shelters) or do we want to solve problems (end homelessness)? What will it take to solve problems (many nonprofits already have great ideas) and why can’t we give permission for them to do what needs to be done?

Please note: These are my personal opinions and do not necessarily reflect the positions of Project LACE.

Photo Credit: Kerri Fernsworth Feazell