Why you should start acting like a for-profit company

“How much of your budget goes towards real projects?”

“If I donate to you, how much of my money will actually be used to help people?”

As someone who works in the nonprofit sector, this kind of question is one of my least favorite things to hear.

I know there are good intentions behind it. Of course, people want to make sure they’re doing as much as they can with their limited resources. They’re wary of a bad actor taking advantage of their generosity, or bad management squandering it.

“Percentage of budget spent on meaningful action” might seem like a good way to measure this. Believe me, I’m fully in favor of nonprofits being smart and avoiding waste.

I get why nonprofits themselves have started to push this number, too. They have to do their best to keep spending low, knowing that they’ll be judged if they don’t.

But I worry that by focusing on this gauge of the situation, we’re missing out on some key factors. Big and small donors may be passing on great organizations that are worthy of their trust. On top of this, it might also be causing nonprofits to make bad spending decisions in order to look better on this one measure of their integrity.

Why do I think that? Let’s take a closer look

What is smart spending?

This might seem strange, but if we want to understand smart spending, I believe that the best place to look is the for-profit world.

Charities have to justify their spending to their donors, who may scrutinize every budget item for its moral value. But businesses have to answer to their board or their shareholders, whose main concern—especially at the highest, most profitable levels—is simple: Are we making money?

Think about that for a minute. Both sectors are focused on being smart, efficient, and getting the most out of every penny. 

So, if a for-profit company thinks something seemingly extravagant is worth investing in, I feel compelled to ask: Why? What are they getting out of it? How is this spending not wasteful?

Here are some of the areas where for-profit companies are happy to spend, but nonprofits are expected to cut corners:

1. High salaries: For-profit companies are willing to pay because they know that good people bring in more value than they cost.

   By insisting on keeping salaries low, you’re essentially asking the smartest, most effective people to work in the nonprofit world for a fraction of what they could be making elsewhere. You’re making their careers a choice between living well and doing good in the world.

   You can guess how that’s turned out so far. If you’re not willing to pay for talent, you’re not going to attract the best.

2. Marketing: Businesses constantly advertise to attract new customers and upsell the ones they have. They wouldn’t put so much into this if it didn’t more than pay for itself.

   Meanwhile, nonprofits need passionate donors to keep their work going, but any spending they do to reach these donors is seen as questionable.

3. R&D: Businesses grow and change, both to adapt to the times and to deliver a better product on a wider scale.

   Nonprofits also have the potential to grow and change. They may want to research how they can improve their approach, how they can function more efficiently, or how they can scale up to help more people. These are complex processes that can require consultants and outside expertise. This money may not be going directly towards helping people, but it’s hardly wasteful.

Greed is a powerful motivator. It’s safe to say that for-profit companies are acting in the most effective way possible to get more money.

By not following their lead, it seems to me that we’re limiting the good our charities can do in the world.

Is it worth it?

If a nonprofit is having a meaningful impact, and you believe in the work that they do, I’d worry less about second-guessing every line on the budget. Just because the money isn’t going directly to the cause doesn’t mean that it’s not doing something important.

Do you agree with my take on this? Or do you think that it’s better for an organization to stay small, keeping away from the complications of too much power and money?