Not-for-profit and profit-for-purpose organisations are both types of entities that pursue social or environmental goals. However, there are differences in their structures, legal status, and approaches in generating revenue.
PROFIT FOR PURPOSE
Many not-for-profits are struggling to survive in an environment that is rapidly changing. Some of these challenges were discussed in a previous article. To adapt and remain viable in this changing environment, organisations are considering developing a profit-for-purpose model.
The profit-for-purpose model, also known as social enterprises or social businesses, is where an organisation aims to generate profits while simultaneously pursuing a social or environmental mission. The profit generated through the social enterprise or business provides an independent stream of income that provides the stability for the organisation to make a social impact. The challenge with being dependent on government funding is that when the political context changes, it impacts the funding. The consequence is a lack of long-term stability in program delivery that is required to really make a change in communities and the lives of people.
What are the key characteristics of profit-for-purpose organisations?
There are six key characteristics of profit-for-purpose organisations.
1. Social or Environmental Mission
Profit-for-Purpose organisations have a clearly defined social or environmental purpose, such as addressing poverty, improving education, promoting environmental sustainability, or supporting community development.
2. Financial Sustainability
Profit-for-purpose organisations aim to create profits through the sale of goods or services, donations, grants, or a combination of these revenue streams. The purpose of being financially sustainable is to have the stability to make an ongoing impact in the area of their social or environmental mission.
3. Re-investing Profits
Rather than distributing profits to shareholders or owners, profit for purpose organisations reinvest a substantial portion of their profits back into the organisation to further advance their social or environmental mission.
4. Ethical Business Practices
What is meant by this, is that profit-for-purpose organisations prioritize ethical and responsible business practices. They will embrace principles such as fair trade, sustainable sourcing, transparent supply chains, and fair treatment of employees.
5. Measuring the social and environmental impact of the services provided by the organisation
Profit for purpose organisations place an emphasis on measuring and evaluating their social or environmental impact. They use metrics and indicators to assess the effectiveness of their initiatives and demonstrate accountability to their stakeholders.
6. Hybrid legal structures
Profit for purpose organizations can adopt various legal structures depending on the country and jurisdiction. Examples include B Corporations (B Corps), social enterprises, community interest companies (CICs), and benefit corporations, among others.
A B Corp is a company that has voluntarily met the highest standards for social and environmental performance. These standards are intentionally set high and cover a company’s impact in key areas, including Governance, Workers, Community, Environment, and Customers. To receive the B Corp certification, the organisation must meet stringent requirements, including completing a comprehensive assessment of their company’s impacts on all stakeholders, and having their assessment verified by B Lab, the nonprofit behind the B Corp certification.
Given these characteristics, what are the main differences between not-for-profit and profit for purpose organisations.
What are the differences between not-for-profit and profit-for-purpose organisations?
There are several differences between both types of entities that must be considered.
The different emphasis in Mission
The mission for most not-for-profit organisations is to address specific social or environmental needs, and any surplus funds are reinvested back into their programs and activities.
Profit-for-purpose organisations have a dual mission. To generate profits and to create a positive social or environmental impact. The consequence of this dual mission is that business activities are aligned with a specific social cause or mission.
The different sources of funding
Not-for-profit organisations rely on a mix of funding sources, such as donations, grants, fundraising events, and government funding, to sustain their operations. As mentioned above, any profits are reinvested in program delivery.
Profit-for-purpose organisations generate revenue through their products or services, often in a market-driven manner. They may reinvest a portion of their profits into furthering their social objectives or contribute a percentage of their revenue to specific causes.
Different Legal statuses between both types of organisations
Not-for-profit organisations are registered as non-profit entities and are governed by specific regulations and laws. Whereas profit-for-purpose organisations can be structured as various legal entities, including for-profit companies, social enterprises, or benefit corporations, depending on the jurisdiction.
Governance and ownership between the two types of organisations
Not-for-profit organisations are typically governed by a board of directors who oversee the organisation’s activities and ensure adherence to its mission and legal obligations.
Within Profit-for-Purpose organisations, there can be shareholders who hold equity in the organisation and prioritise both the financial returns and the social or environmental impact of the business.
The challenge with being dependent on government funding is that when the political context changes, it directly impacts funding.
Things to think through when considering transforming not-for-profit organisations into profit-for-purpose entities
By blending business principles with a focus on social or environmental impact, profit for purpose organisations create sustainable and scalable solutions to societal challenges. This makes the profit-for purpose structure very appealing to many not-for-profit organisations.
However, to make this transformation, there are several important things to consider, including the following three.
The importance of having a clear revenue generation strategy
Not-for-profit organisations typically rely on donations, grants, and fundraising efforts to sustain their operations. To become profit-for-purpose, it is crucial to develop a clear revenue generation strategy. This involves identifying potential sources of income that align with your organisation's mission and activities. For example, revenue streams such as fee-based services, product sales, partnerships with businesses, or social enterprise initiatives could be considered. It is essential to analyse the market and consider the organisation's strengths to determine viable revenue sources that support the organisation’s purpose.
Implement effective business planning
Shifting from a not-for-profit to a profit-for-purpose model requires careful planning and strategic decision-making. This includes, developing a comprehensive business plan that outlines the organisation's mission, objectives, target market, products or services, competitive advantage, marketing strategy, and financial projections. This plan should also consider factors like pricing, cost structure, scalability, and risk management. The business plan serves as a roadmap for the organisation's transition and provides a framework for making informed business decisions.
Build strong governance and financial management within the organisation
Effective governance and financial management are crucial for any organisation's success, especially when transitioning to a profit-for-purpose model. It is crucial to strengthen the organisation’s governance structure by establishing a board of directors with diverse expertise and a shared vision for the organisation. Equally important is ensuring transparency, accountability, and sound decision-making processes are in place; including robust financial management systems, accurate bookkeeping, budgeting, and financial reporting.
Having strong governance and financial management enables the organisation to monitor and track its financial health, make informed decisions, and demonstrate accountability.
If a decision is made to transition from a not-for-profit to a profit-for-purpose model careful consideration of legal and regulatory requirements, as well as potential implications for tax-exempt status and donor relationships must be made. It is advisable to consult with legal and financial professionals who specialize in non-profit organisations to ensure compliance and navigate the transition successfully.
Not-for-profit organisations and profit-for-purpose organisations are both types of entities that pursue social or environmental goals. However, there are differences in their structures, legal status, and approaches to generating revenue.
In summary, not-for-profit organisations primarily focus on their mission and rely on external funding sources, while profit-for-purpose organisations aim to generate profits while also pursuing social or environmental goals. Given the challenges faced by many not-for-profit organisations, it may be time to consider alternative structures that provide more sustainability to enable entities to achieve their social and environmental goals.
