A Focus On Non-Profit Organizations By: Gabriel PotterMBA, AIFA®

Corporate America is largely driven by the profit incentive: a business should bring in more money than it spends so the owners can keep the profit. There are other organizations – charitable, religious, healthcare, educational, publicly governed, and so on — which choose to relinquish their surplus revenues to advance a specific mission. Since these non-profit organizations generally serve the community, they earn some tax advantages from the government to incentivize and protect them.

The standards for business management, retirement planning, benefit planning, and ancillary operations generally follow the precedents set by the traditional for-profit corporate entities. However, there are some unique elements — positive and negative — which non-profit organizations have to navigate. 

For instance, non-profit organizations have agreed to divest their surplus revenues into their mission which means resource management becomes especially difficult. Non-profit organizations often do not have a “rainy-day fund” or other excess retained earnings sleeve which might allow them to smooth out their earning and spending trends over time. Non-profit organizations cannot access funding the way a for-profit company can. A for-profit company can sell ownership stakes (initial public offerings and other stock sales) or simply borrow money from bond investors or the commercial paper market if they have a cash shortfall. On the plus side, successful non-profit organizations usually have community goodwill and a potential donor base to draw upon when necessary. A non-profit organization’s chief financial officer must instead find a way of transforming grants, private donations, pledge drives, and sporadic government support into a stable flow of dollars to maintain the organization and fund new projects. 

Non-profits simply have a different culture than many for-profit businesses and this translates into eccentricities which human resource staffers have to negotiate around. For instance, non-profits attract passionate people, inspired by the organization’s mission, and human resource staffers must figure out how to funnel that energy in positive ways. More accurately, non-profit organizations tend to employ the passionate advocates because, on a strictly financial scale, they tend to underpay employees relative to for-profit corporate wages. From an operational perspective, coordinating that positive energy into a consistent team effort among a greater number of non-professionals, potentially underpaid employees, and part-time volunteers can be a significant challenge.

More broadly, non-profits often rely on community engagement to meet their goals, financial or otherwise. Managing community good will and demonstrating value to the community — particularly the donor base – can keep the organization healthy in times of stress, and growing as necessary. Therefore, catering to the aspirations of the active donor base becomes essential for successful non-profit organizations. Non-profit organizations that overtax community good will can risk donor fatigue and long term disengagement of key members. 

There are challenges, too large to include in this brief introduction, which deserve more attention. For instance, a corporate 401(k) defined contribution plan has an analogous non-profit counterpart: the 403(b) plan. 403(b) plans are run with slightly different rules than traditional 401(k)s, so consultants and plan sponsors should be wary of these differences.

With more than 1.6 million non-profit organizations in the United States, representing many millions of employees, it is worth taking time to consider the unique circumstances of these entities. We hope you now have a small idea of the unique challenges — structural and operational — that non-profit organizations have to manage.

 
Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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