not for profit financials

Profit is not a dirty word – NFP Principles

“There is a perception among some NFPs that they should not set and achieve ambitious profit goals because this may be viewed poorly by stakeholders. However, aiming to achieve long-term financial sustainability should be a core goal of all organisations.”

The Australian Institute of Company Directors (AICD) issued a refreshed Not-for-Profit Governance Principles earlier this year. An area of focus surfacing from the changes was profit. To paraphrase the report – there is a perception among some not-for-profit (NFP) organisations that generating a profit should not be a priority for the Board. They believe setting ambitious or even conservative profit goals may be viewed poorly by stakeholders. However, aiming to achieve long-term financial sustainability should be a core goal of any organisation to ensure they can achieve their purpose now and into the future.

This involves prioritising finances when making organisational decisions and aiming to build and maintain the financial strength of the organisation.

Innovative NFPs are finding new ways to drive profit. In particular the following concepts are regular points of discussion at Board and Executive level:

  • Growth
  • Own-source income
  • Becoming more commercial
  • Social enterprises
  • Mergers
  • Remaining competitive.

Profit – after the right decisions are made

Whilst NFPs should be aiming to generate a profit, they should not pursue this goal at the expense of sound ethical practices or delivering their purpose. It is the Board’s responsibility to determine a financial vision for the organisation and communicate this vision to all stakeholders.

There has recently been some significant changes to the NFP operating environment. These include person-centred funding, greater competition, larger funding contracts to fewer recipients, and outcome-based funding trends. Additionally the Aged Care Inquiry and the Royal Commission into Child Sexual Abuse has highlighted governance failings.

It’s fair to say expectations on directors are increasing, and NFP Boards should consider their skills and capabilities to manage their duties. If the Board falls short of the required mix, recruitment and rotation may be desirable.

What’s next:

  • Distribute the refreshed NPF Governance Principles Report to your Board and Executives
  • Consider a Board self-assessment against the Principles
  • Consider your strategic initiatives in light of the Principles.

Ask these questions:

  • Do you need more profit to enable your initiatives?
    • How much?
  • Does your revenue streams/mix promote profit and financial sustainability?
    • If not – what changes are required?
  • If the changes can’t be achieved, will you remain financially sustainable?
    • If not – what are your options?

Brad Ead, Audit Partner.

All organisations, including NFPs, should aim to generate a profit to ensure it remains solvent into the future therefore allowing it to continue to deliver its core purpose. If your NFP is experiencing surplus problems let us help. Call 03 5443 0344 to speak to Brad Ead, Partner at AFS & Associates.

 

 

Note: These Principles differ from the Governance Standards issued by the Australian Charities and Not-for-profits Commission (applicable only to the Charity sub-group of Not-for-profits and mandatory to charities to remain a registered charity with the ACNC).