Not for Profits Must Make a Profit

Almost half of Australia’s Not for Profit organisations expect to only break-even or make a loss over the next three years.

The 2016 NFP Governance and Performance Study, from the Australian Institute of Company Directors (AICD), found 59 per cent of organisations believe they will make a profit, 25 per cent expect to break even and 17 per cent anticipate a loss.

It’s a slightly more pessimistic outlook compared to results from the previous three years, where 64 per cent made a profit, 20 per cent broke even and 14 per cent made a loss.

AICD managing director and CEO John Brogden said Not for Profits must aim to be financially strong.

“There can be no doubt that NFPs do need to make a profit,” Brogden said.

“Profit is the foundation of building the long-term confidence needed for a NFP to achieve its purpose.

“It’s alarming that some directors are saying the capacity of their organisation to meet their purpose will, in real terms, shrink moving forward. Directors and boards need to seriously consider their roles and drive the cultural change necessary to support the long-term financial strength of their organisations.”

However, 31 per cent of the 1,800 Not for Profit directors surveyed said their organisation had a profit margin of more than 6 per cent in the last financial year.

“Many NFPs are not just surviving, but thriving. However, responses to the survey indicate that directors’ understanding of their roles as financial stewards, is highly variable,” Brogden said.

“NFPs making a profit can be a challenging concept for government and the broader community, but without long-term financial strength, the sector will not be able to deliver vital services.”

In the last financial year, 42 per cent of organisations made a profit up to 5 per cent, 12 per cent broke even, 8 per cent had a loss of up to 5 per cent and 5 per cent made a loss of 6 or more per cent.

Despite the push for charity mergers from the Community Council for Australia, the study found rates of mergers had not changed over the past year.

Just over a third of directors, 35 per cent, reported that their organisation had discussed a merger in the last 12 months, which was the same result as the 2015 study.

However, the Australian Charities and Not-for-profits Commission took a more positive view. Commissioner Susan Pascoe AM, who launched the report on Thursday, highlighted collaboration and innovation in the sector.

“This is an adaptable and resourceful sector,” Pascoe said.

“In response to changes in the operating environment, 35 per cent of Not for Profits stated that they have discussed a merger in the past 12 months, 8 per cent are currently involved in a merger and 6 per cent had completed a merger.

“Not for Profits are also working together – nearly half stated that they subcontract some services to other NFPs, a quarter share resources, and 15 per cent share back office functions.

“This report illustrates that much of the Australian Not for Profit sector is innovative, collaborative and responsive to market forces. It also highlights a need for some directors to focus more on strategy and financial sustainability.”

The report also found Not for Profit leaders held “deep-seated and negative” perceptions of the sector.

Despite 74 per cent of directors believing their organisation was efficient, only 32 per cent believe this to be true of the broader sector.

“These perceptions do not align with the reality of the modern, sophisticated and well governed NFPs of today,” the report said.

“Furthermore, we have been measuring these assumptions for several years and there has been little change.

“The responsibility for redefining the perceptions of the NFP sector rests with the sector itself.

“Fostering a more accurate understanding of NFPs will require deliberate and collective effort. At the individual level, directors and CEOs who work with NFPs should examine their own beliefs and behaviours to ensure that they are setting appropriate expectations and not reinforcing negative ones.”

In particular, the report said Not for Profits must change their perception within government and be clearer in communicating their needs.

“We need to have a new conversation with governments about the way they fund and regulate the sector,” Brogden said.

“Funding contracts are often short-term and prescriptive. Most stipulate how funds are to be spent and some even require that NFPs account for any profit they make or, worse, return unspent funds to government.

“Government is rightly asking for improved governance among NFPs, but constricting their ability to achieve good governance through archaic funding practices.”

The report said the relationship between the sector and governments required a genuine partnership approach.

“The NFP sector needs to clearly articulate what it wants from government. In all previous studies, directors have commented on the need for governments to better understand and work with the NFP sector,” it said.

“Reviewing the data over the last five years, it appears that little has changed, despite major initiatives such as the establishment of the Australian Charities and Not-for-profits Commission, state/territory government compacts with the NFP sector, and the development of longerterm contracts.”

The burden of red tape was also an issue raised by directors in the study. More than half of respondents said federal, state and territory governments were not consistent in their approach to contracting for services.

Two-thirds of directors want more stability in government policy and  55 per cent want their administrative burden reduced.

The study was conducted by research firm BaxterLawley and sponsored by Commonwealth Bank, it can be downloaded here.