Opinion: Stop Calling Yourself a Nonprofit (You Are a Tax-Exempt Organization)

In the nonprofit sector, perception is often reality, and labels can carry a heavy weight. When the board, donors and constituents view your organization as being a “nonprofit,” there can be an inherent bias about how you should operate—with a heavy scrutiny on overhead and fund allocation.

By shifting this perception to being known as a “tax-exempt” organization, nonprofits can leverage the status to best advance the mission. This includes investing in talent, programs, marketing and fundraising efforts to raise an organization to the next level.

A core part of creating this perception change is developing operational approaches that mirror the for-profit sector. This involves creating strategies that can help build the financial foundation that allow nonprofits to not always rely on money coming in from donors and other fundraising organizations.

For example, by having a tax-exempt status, nonprofits can take full advantage of leveraging this tax savings for future growth—even though stakeholders are different for nonprofits. Scrutiny from donors, board members and charity evaluators, like Charity Navigator, can create many challenges that impact funding.

As such, many nonprofits take an annual zero-budget approach to achieving the organization’s mission, which makes it more difficult to reinvest back into talent and program expansion. Many for-profit organizations take as much as 25 percent of the bottom line to reinvest into the growth of the company—this same approach should be considered at nonprofits.

In addition, by managing all lines of business and understanding what programs are more “profitable” than others, it’s easier to gain a sense of how to best analyze effectiveness and determine priorities.

For example, for organizations that help those with developmental disabilities, day programs tend to be “loss leaders” profit-wise, though these programs are drivers for higher yielding residential programs. This is much like Target selling $0.99 items at the front of their stores at a loss to entice people to shop further. The investment into selling lower-costs items translates into revenue generation.

The key is knowing what programs are actually driving money in the door, and then putting additional resources into them to help continue to fund the organization’s mission.

From a competition perspective, the nonprofit sector can be just as challenging, if not more, than the private sector. For organizations that receive government funding, there’s an inherent bias from donors who feel like they are already supporting the nonprofit through their taxes. With government grants, comes a higher level of scrutiny on spending—often forcing nonprofits to focus on other fundraising avenues to cover overhead.

This further reinforces the need to invest in the right talent to help drive what is most important for an organization, its mission. For large global nonprofits, it’s much easier to hire former investment bankers, retired politicians and other big names that can help advance business growth through their connections and PR prowess.

In the world of smaller nonprofits, it’s not as easy to attract big-ticket talent. However, there has been a rise in “sector switchers,” where encore career professional are looking to shift into more meaningful work at nonprofits. Talent is often the most valuable asset for most nonprofits and should be treated as such.

In addition, the right leadership training can help advance mid-level employees and provide the tools that existing senior leaders need to guide a nonprofit into a more financially sound arena.

Switching to the for-profit mindset is often much easier said than done. However, by fully embracing the concept of being a tax-exempt organization, it is possible to start viewing yourself as being a profit-driven business. From there, it’s all a matter of investing in marketing, talent and other operational items that drive true growth in accomplishment of the organization’s mission.

The first step is to stop calling yourself a nonprofit.