Nonprofit or Not Profiting? A Critical Examination of Nonprofit Finance

by Alexandra Holness

We are all motivated by money, even the most idealistic among us. It might sound like an ugly thing to say, but it’s true. You can read about how much our society depends on money and how we moved from material to nominal in the dissertation discussion chapter. If we weren’t, our world would look a lot different. Money is why we work – even dreamers need to bring home a paycheck – and it provides the means for our play. In business, money rewards a job well done and measures success. It’s part of the reason why we keep doing what we’re doing, and why we strive to get better and better. Unless, of course, if we are a nonprofit arts organization.

To clarify, “nonprofit” does not exclude the possibility for profit, but rather indicates that an organization has surrendered any motivation to profit. Nonprofit arts organizations promise to direct all (if any) surplus revenues toward accomplishing their mission. Nonprofit arts organizations also do not operate on the traditional economic supply and demand curve. Production costs are often so high that equilibrium prices — i.e. the “real” per-person cost of an arts experience — would exclude the majority of interested attendees. And in a world where interest in the arts is unfortunately already dwindling, this would leave nearly all arts organizations out of business, and our society devoid of art. Consequently many of these organizations are granted a special 501(c)3 tax status. To further help sustain their operations, arts organizations also operate within a second market: the market for philanthropic dollars, the market of external funding. Thanks to this additional support, nonprofit arts organizations can pursue their artistic callings without much financial burden, or at least without conforming strictly to the law of supply and demand. Right?

In reality, the nonprofit financial structure can often be more of a burden than a blessing. In her article, “The Looking Glass World of Nonprofit Money”, Clara Miller discusses the inherent flaws of the nonprofit financial system. Specifically, she exposes the difficulties associated with juggling a consumer market with an external funding market. “The players in these two markets have diverse and sometimes contradictory goals, and nonprofit managers spend time and attention marketing to them all. This adds complexity and high transaction costs to the business – and a constant tension over mission”. Furthermore, contributed income often comes in the form of restricted funds, funds that must be used for a donor-designated purpose. Unfortunately donors are not always the wisest of fund allocators. Restricted funds often neglect areas of actual need in an organization, and can also incur unforeseen associated costs. Restricted funds can also give an organization a false sense of solvency, for they may have the funds, but they cannot use the funds. Contributed income can, and often does, effectively impede a nonprofit’s business operations and may even obstruct them from accomplishing their artistic mission.

Miller also dives into the psychology of funders. She claims that a “mentality pervades the sector: surpluses are bad! They signify that you don’t really need the money, and that we’re giving you too much”. If this is true, a nonprofit status may be instituting a disincentive. Perhaps it has even instituted counter productivity in the nonprofit workplace. However, Miller’s assumption is debatable. Many funders see surplus as a positive thing, for it indicates the organization’s financial stability and responsibility. But her argument does draw attention to the potency of profits.

Profits serve an important function. They give people incentive to work. Not only because people love money, but also because profits serve as our best indicator of success and a job well done. Luckily, nonprofit arts organizations are staffed with passionate people who are willing to work long, strenuous, and thankless hours because they believe in their organization’s artistic mission. They do not require profit as incentive to do well and work hard. However, they do require indication that their hard work is making some impact.

The problem is, in an arts environment, it’s very difficult to measure success in non-monetary terms. Sure, we can count attendance, cite reviews, survey attendees, but these measurements do not hold significant weight. Currently, there are very few, if any, truly adequate measurable indicators for the success of a nonprofit arts organization. Development departments struggle with this daily. The organization requires external funding to operate, but without profits in the conversation, they cannot concretely, or quantifiably, justify why they deserve it. And don’t forget about our hard working and passionate staff members. If we can’t quantitatively justify to them how their work makes a real impact, well, they burn out. And inevitably, business operations suffer. And perhaps, so does the art.

I can’t help but wonder, which comes first: the nonprofit status, or not profiting? Does the organization become a nonprofit because it cannot sustain itself in the capitalist market, or can the organization not sustain itself in the capitalist market because it is nonprofit? Surely our society needs the charitable intention pursued by nonprofit organizations. Yet the economics of nonprofits might be worth our attention, and perhaps we have protected ourselves from an uncomfortable topic for too long.

Articles of Related Interest from The Muse Dialogue:

“Fashion in the Arts: A Powerful Collaboration of Creative Minds” by Alexandra Holness. An examination of how some arts have incorporated fashion, and commercial fashion designers, into their work.

“A Trip to a Craft Show, To Find Art” by Alexandra Holness. Holness visits a craft show, where she discusses the functions of utility and commercial viability for crafters, who make artistic work for sale.

“Film and the Burden of Success” by Andrew Swensen. A consideration of the business of film and the art of film, and where each measures “success”.