The Nonprofit ROI

Often I am asked about the differences between for-profit and nonprofit organizations.

Actually, there are many similarities. There are legal responsibilities. There are federal and state filings. There are record keeping, accounting, investment and audit obligations. Establishing a balanced, or even surplus budget is a worked-for outcome in each case. There are facilities, human resources, insurance and equipment to support and manage. There are marketing and “sales” efforts that involve identifying the customer, understanding how they receive their information and what it is they need or want.

And the major difference: While a for-profit business exchanges a product or service for money, a nonprofit usually provides, for donations of any size, an expectation that a positive difference in being made in the world.

A for-profit business is established with one significant purpose in mind—to make a profit for the owner (investors, stockholders, etc.). There is always an expected financial return-on-investment, or ROI. In the nonprofit sector, the ROI is different: Results – Outcomes – Impact.

Measuring ROI is also different. Profit is a relatively easy measurement, but community impact is something else. I remember the story of a pastor who ran a homeless shelter and one of the regulars died. The shelter was small, and someone asked him about the measurable impact it had on the community. The pastor responded that there were six men at the man’s funeral. Connections, relationships, and networks are as critical as a roof in some cases, but how does one really measure that impact?

In the for-profit sector, customers expect most of their dollars to go to the cost of the product or service – including operational overhead – with a small ROI for the owners. In the nonprofit sector, donors expect most of their money to go to the ROI, with a small operating allowance, if any, for the nonprofit to carry out its mission. This difference is real, significant, and causes nonprofits to work extremely hard to keep overhead low – sometimes too low. A larger investment in marketing, or in technology, or in a new program might move the community improvement needle a little farther. Many donors don’t like to think their gifts are being used for marketing or computers or wages, instead of for medicine for sick children, food for puppies, shelter for the homeless, or scholarships for college students. It’s all quite understandable.

But look again at the list of similarities. And look again at the difference in the expectation in the ROIs. Ask the CEO of your favorite nonprofit what keeps him/her up at night. Write a little bigger check. Understanding these differences will help you to live generously, and help the nonprofit sector to help us all.

Denise K. Spencer
President and CEO