Nonprofits and profitability: Where do your donated dollars really go?

Have you ever wondered what happens to the money you donate to nonprofit organizations? Or do you not donate because you don't know where it goes? Many people want to give to charitable causes, but become hesitant when they realize how little they know about how nonprofits handle their money. The unanswered questions at the top of hesitant donors' lists: Can a nonprofit organization be a profitable business? And, if nonprofits are profitable businesses, does that mean that donated dollars are not being put to good use?

Not surprisingly, nonprofits can be, and often are run as profitable businesses. But a profitable nonprofit is not like every other profitable business. "Nonprofit" means these organizations cannot have any profits at the end of the fiscal year. With the exception of endowments and savings, all of the money that comes in must also go out.

The idea behind the rule is to require charitable organizations to dedicate as much income as possible to the charitable purpose they purport to serve. Nonprofits are presumed to use all the money in excess of what they need to run their operations for their claimed cause. Because charitable spending is closely tied to claimed business costs, some suggest that the real question cautious donors need to be asking is, "Are nonprofits taking more than their fair share of donated money for business use?"

Critics assert nonprofits' business arms take more than their fair share, paying CEOs astronomical amounts of money. That money should, they say, be used to further the charitable purposes for which these nonprofits were set up.

Others suggest that nonprofits, like any other business, compete to woo the best, brightest, and boldest people. In the course of that competition, it is only natural that salaries will trend upward for those who are most desirable. Those who perform at a superior level will be rewarded financially. From CEOs to accountants to receptionists, a nonprofit needs the same services and expertise that any for-profit business requires. The people who fill those roles are just as capable and desirable as those who work in the for-profit markets.

The idea of paying an employee his going rate in the global marketplace makes sense to most skeptics. It is a little harder to convince those critics that the endowments and savings that many nonprofits stockpile are actually essential to their continued viability. In order to assess whether or not the charitable organization of your choice is creating reserves in excess of their needs, or perhaps more accurately, in excess of their projected deficiencies, some research, and sometimes even a request for literature, may be in order. Even then, many skeptics believe that the big picture is almost never clarified by the legions of businessmen posing as do-gooders.

Those most frequently criticized tend to be those closest the nonprofit limelight. Massive organizations like the Red Cross and the March of Dimes tend to be the target of most skeptics discussions. However, with just a little internet research, any interested party can discover that highly visible does not necessarily equal highly inefficient. In reality, nonprofits are as unique as the people who run them—each has its own distinct personality and unique make-up. Broad generalizations about nonprofit angels or crooks will tend to be wrong as just often as they are right. What does that mean for a charitable donor? Each nonprofit must be analyzed on a case-by-case basis. That organization that you think is overpaying its CEO just might be the best thing to happen to your favorite charitable cause.