The Profit Motive is a widely discussed and acknowledged concept in the business world. Generally speaking, it’s one of the few common themes and motivations in all businesses. The majority of business analysis and managerial accounting efforts are designed to fulfill and satisfy the profit motive. But do non-profit and charitable organizations have a profit motive as well?
The convergence of the Profit Motive with managerial accounting helps us understand these key business questions:
- What is the entity’s Gross Margin and how can it be increased?
- How can an entity’s cost structures be adjusted to deliver an increased Net Operating Income?
- Can the entity’s Balance Sheet be strengthened to provide long-term viability and fund future investments in the entity?
- Are the stakeholder’s of the entity receiving an appropriate rate of return on their investment?
On the surface, these types of questions appear to be unrelated to Non-Profit entities. However, we believe these types of questions are just as applicable to Non-Profit entities as they are for traditional businesses. Non-Profit should entities do have a Profit Motive, should readily acknowledge the motive and perform business analysis just as a for-profit business entity would.
Ultimately, the key issue in appreciating this paradigm shift is to consider how the Profit Motive is measured for Non-Profits. The departure from the traditional appreciation of the Profit Motive becomes this question, how is the Profit Motive measured with a Non-Profit?
Consider a theoretical Non-Profit with a charter to provide a community’s homeless population with nutritious meals. An account structure for the entity’s Statement of Income and Expenses (a Non-Profit’s version of the Income Statement) would move to separate the direct costs with producing and delivering the meals just as a restaurant’s financial statements would in a traditional Cost of Goods Sold section. For managerial accounting purposes, it would be appropriate to retitle this section as Cost of Programs. If properly accounted for, this separation would also facilitate a more efficient production of the annual 990 tax filing requirement for the Non-Profit.
More importantly, this transition would also facilitate a deeper understanding of specific program costs relative to the cost structures required to administer the entity, which would be accounted for as traditional for-profit entities account for General & Administrative expenses.
Adding a final line to the entity’s Statement of Income and Expenses would further enhance the acknowledgment of the entity’s Profit Motive. In this example, the Statement of Income & Expense could include a final line titled “Profit Motive – Meals Served.” The managerial accounting statements ought to include a specific objective measurement that quantifies the entity’s performance relative to the stated mission.
When executed and presented to the entity’s management team and Directors, experience has shown that an interesting and powerful dynamic begins to take hold. Finance and cost structure decision points start become discussed in the specific terms on how a given decision improves this objective measure. In many cases, decision making becomes easier when it’s tied to outcomes.
TGG loves helping nonprofits better realize their missions through sound financial management and accounting procedures. Contact us today to learn more about how our experts can help.
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