Finances and Nonprofit Organizations—
Myths and Reality
Anne Easterday,
Jane Berendsen-Hill, and Marcia Lutostanski
LLLI Board of Directors
From: LEAVEN, Vol. 38 No. 4, August-September 2002 p. 74, 96.
Many LLL meetings have focused
on debunking “Myths about Breastfeeding.” Did you know that
there are also “Myths about the Finances of Nonprofit Organizations?”
Just like other myths, these are fictitious tales, but they’ve
been passed along through so many tellers that many people believe them
just because they’ve heard them so often. Here are some of the
myths:
A Nonprofit Organization
Can’t Charge for Its Services
Although charitable donations
are an essential source of income for many nonprofit organizations,
many rely heavily on the fees they charge for their services. La Leche
League provides services free of charge to mothers and babies, but we
depend on income from memberships to cover some of the services provided
to members. La Leche League could not exist solely on membership fees
but they are an important part of our income.
Nonprofit Organizations
Operate with Different Standards Than For-Profit Businesses
This is not true. Effective
and efficient business practices are a must for economic survival regardless
of the purpose of the organization.
The Budget of a Nonprofit
Organization Needs to Be Balanced So That Income and Expenses Are Equal
Over time, the financial
goal of a for-profit company is to maximize profits so that the owners
or shareholders make money. The financial goal of a nonprofit organization
is to earn enough income to continue programs in pursuit of its mission
and make it possible to carry out new programs.
A Nonprofit Organization
Can’t Make a Profit
Even though La Leche League
is an international organization, it is also a nonprofit corporation
incorporated in the state of Illinois, USA. Therefore, the laws of the
United States and the state of Illinois apply to its finances. The United
States Internal Revenue Service (IRS) guidelines clearly state that
any profits (an excess of income over expenses) gained by a nonprofit
corporation can’t be distributed to board members. They do not
say that a nonprofit organization can’t make a profit. In fact,
nonprofit organizations need profits not only to do what they do to
fulfill their mission, but also to pay for building and equipment upkeep,
volunteer and staff development, and to implement new projects. For
this reason, not-for-profit is a more accurate term than nonprofit.
Now for the Reality
The 2001-2002 Fiscal Year
was a seriously difficult one for LLLI finances. We ended the year with
a significant deficit of several hundred thousand dollars. ( Note: “LLLI
finances” refers to activities originating in or coordinated through
the registered office in Schaumburg, Illinois, USA. It does not include
the finances of Groups, Areas, Affiliates, or Divisions.) Our major
sources of revenue—sales, memberships, subscriptions, royalties,
and donations—did not bring in as much income as we had anticipated
and we still had to honor our obligations and pay our bills. As a result,
we ended the year in a deficit situation. Other organizations (both
not-for-profit as well as for-profit) experienced similar difficulties
last year due in large part to the economic environment.
The Board has an obligation
to the organization to respond to such a large deficit. We have responded
in several ways: supporting the efforts of the Executive Director and
office and field staff in efforts to increase revenue, reviewing organizational
priorities, and planning for the long-term to ensure better financial
stability.
Another way we have responded
is to work with the Executive Director in exploring some new perspectives
on LLLI finances—looking at some new ways of analyzing the income
and expenses of the organization. Looking through different “lenses”
is a way to separate out the many aspects of a problem and at the same
time focus on each aspect from various “distances” or perspectives.
Think of this as similar to changing magnification on a microscope to
look at the same slide, or changing a filter or zoom lens on a camera.
From the vantage point of each perspective, there is usually at least
one right answer. When seen from many perspectives, many right answers
may be found. The ordinary can turn into the extraordinary, and creative
solutions may emerge.
To develop some different
perspectives, the Board has been working with the Executive Director
and her staff in exploring a different kind of financial analysis. In
mid-April, a small group including Board members Lynne Coates, Anne
Easterday, and Marcia Lutostanski; Executive Director Anne Gaskell;
Operations Director Tami Harris; and Finance Director Mike Giuntoli
met over a long weekend. We also had input from the members of our Management
Advisory Council: John Lutostanski, Hugh Switzer, and Cindy Smith.
We began with the carefully
recorded financial data from our Finance Director. Our current financial
statements give one perspective on LLLI finances—a perspective
based on income and expenditures of the various departments. We reorganized
this data by allocating income and expenses to specific programs and
projects within those departments. For example, within the Education
Department, the 800-line, Center for Breastfeeding Information, LLLI
Conference, Physicians’ Seminar, Lactation Specialist Workshops,
and the Peer Counselor Training Program were each separated out. Indirect
expenses were also allocated to each project. Indirect expenses are
those that are not a project or program in themselves—such as building
costs, administrative expenses, and insurance. These provide necessary
support for the mission-related activities to exist. This way of looking
at income and expenses is generally called project-based budgeting or
total cost-to-serve accounting.
Once we looked at the data
in this way, we found that some projects previously thought to be generating
a profit did not do so. Some activities only generated enough revenue
to cover their costs even though we thought they were making a profit
that could be used for non-revenue generating activities. An example
was the 2001 International Conference in Chicago. Using department-based
accounting, the 2001 International Conference made a profit. But when
viewed using the new method of accounting that includes both direct
and indirect costs, the Conference did not generate extra income for
the organization.
Clearly, not every program
or project carried out by LLLI will create a profit. Many, such as the
800-line or LLLI representation at WHO and UNICEF activities, are not
meant to. Just because they do not generate income does not mean that
they are of less value to our mission or our organization. We need to
continually evaluate all LLLI activities in terms of both their cost
and their benefit in fulfilling our mission.
At this point, Board and
staff are working together to reframe our financial problems into new
opportunities. There are many projects LLLI would like to initiate as
we pursue our mission of helping mothers worldwide to breastfeed. However,
at this time, we have to prioritize what we would most like to do and
focus on doing what we do well. This year we are focusing on increasing
trust, promoting growth and development, and building capacity. Building
capacity includes the development of our human and financial resources
as well as the ability to explore beyond our usual patterns and perspectives
To guide us in this work,
we are using the principles being developed by the Drafting Team and
distributed by the Review Network as part of the renewal initiative.
These principles are statements of how participants will conduct themselves
in pursuit of the purpose. We have chosen the following principles as
the ones that seem most appropriate to LLLI finances; these are related
to how we work together as a whole system.
Remain Open and Welcoming
To New Participants and Parts
Rather than the Board working
in a vacuum to set priorities for LLLI, we seek input from the organization
as a whole. Last year, we asked Leaders, staff, the Professional Advisory
Board, Leader Applicants, Group members, members of the Alumnae Association,
and others for their thoughts about LLLI priorities and where our resources
would be best utilized to fulfill our mission.
Ensure Diversity and
Health
The health of an organization
depends on several factors, one of which is adequate finances to support
the work of the organization. Ensuring diversity can be one way to encourage
creative explorations of new sources of revenue as well as looking into
new ways of reaching mothers.
Create Conditions That
Foster Learning, Development, and Growth
That is how healthy systems
adapt and stay healthy. The Board and office and field staff are using
the financial results of the past year as an opportunity to learn more
about how best to organize our financial information for the clearest
picture, to discover new sources of funding, and to develop alternative
ways of generating income. As a first step, the Executive Director has
worked with the Board to reorganize staff functions at the LLLI office
that will allow for greater effectiveness and enhanced creativity.
Keep or Shift Power,
Authority, and Resources at the Smallest or Most Local Part That Includes
All Relevant and Affected Parties
Groups and local Leaders
play a significant role in the financial health of the organization
as a whole. Leaders, Groups, and Areas assume responsibility for their
own activities in pursuit of the mission, including finding ways of
funding those activities. The shifting of power, authority, and resources
from a central location to more local parts will take time. It may be
possible in the future that some of the centralized functions will be
accomplished by other LLL entities.
Remain Coherent and
Disciplined As a Whole
Ultimately, the effective
pursuit of La Leche League’s mission is a shared responsibility
of the organization as a whole—an organization made up of thousands
of individuals and hundreds of entities actively engaged in activities
that fulfill our purpose. Our effectiveness as a whole depends on the
effectiveness of the parts, on the diverse parts remaining connected
together, and on the disciplined use of resources. Financial discipline
includes careful analysis and a thoughtful prioritizing of activities.
La Leche League is a successful
organization because we are a community with a shared mission. Together,
we are committed to learning to work in new ways to lead the organization
into the future. By remaining open to change, LLLI can continue to adapt
to best meet the needs of mothers and babies. Thank you for all you
do for this community at whatever level your involvement is–as
a Leader, a Leader Applicant, an administrator, a staff member, a donor,
or any combination of these.
Page last edited Sun Oct 14 09:31:34 UTC 2007.
