Finances and Nonprofit Organizations—
Myths and Reality
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.