Run like a Business

Giving Matters by Lawson Knight

One thing that I hear fairly often is that a charity needs to “run like business.” While in times past this may have simply been good advice, today it is an imperative. To understand why this is so, it is important to begin with what separates a non-profit from a for-profit business. Then, I would like to share some factors in today’s working world that make running a charity necessarily like running a business.

The biggest difference between a normal for-profit business and a charity is the charity’s tax-exempt status. When the Federal government agrees that the non-profit is providing a benefit to society, an income-tax exemption is issued. This exemption does not cover state taxes, payroll taxes or most other forms of taxation. The other primary difference between the for-profit sector and the non-profit sector is that a private business makes money when it sells goods or services to a customer.

For a charity, the person supplying money to make the operation go, at least in part, is the donor. A donor is not the recipient of the good or service. Even though money may come from a variety of sources to a non-profit from fees for service, such as a gym membership at the YMCA, or Federal sources, such as rental subsidies, a charity must demonstrate to the Federal government that it is supported by the public to retain its tax-exempt status. This is called the Public Support Test.

To review, a charity has an exemption from Federal income tax and primarily does not sell goods or services to a customer. However, like private business a charity has very similar costs. It must pay employees, needs physical space to do work and has capital expenses for computers, desks and the like.

In order to stay in business, the charity must “run like a business.” To balance a budget, a charity must be cost conscious with an eye toward the bottom line. The bottom line is not profit, but hopefully left over money in the bank account to keep the concern running. Further, because of the tax-exemption, a non-profit’s business information is public. Donors, including individuals, businesses and foundations, have open access to the charity’s books—what employees are paid, where money comes from and generally the financial condition of the operation.

Charities are challenged, too, by the increasing competition for funds. Donors have more options for their gifts every year. Federal grant dollars are shrinking and becoming more scarce. In a quest to retain quality employees, pay and benefits have been growing in the non-profit sector. Inflation on items like energy affects charities just like any other business. Perhaps the principle of “run like a business” should work in reverse. When we see a well-run charity, we should say “I wish private business ran like that.”


Lawson Knight is the Executive Director of the Blue Mountain Community Foundation, located in the Baker Building, 8 South 2nd Ave., Suite 618, Walla Walla, WA 99362.
He may be contacted at 529-4371 or by e-mail.