Financial issue: differences and similarities between for-profit and not-for-profit accounting. While for profit organizations and not-for-profit organizations are different in many ways, even down to the core of how and why they conduct business and operate, there are also some similarities about them. Some similarities even go into their accounting uses and methods. Because they both do monetary transactions, they must have some similarities; however because they are very different, they also have major differences in how they conduct monetary transactions.
Differences and Similarities A major similarity is, of course, that not-for-profits and for-profits alike must report its finances to the Internal Revenue Service (IRS). However, nonprofits tax status will be exempt from income taxes if the IRS approves the organization as a 501(c). Nonprofits are required to provide financial statements by U.S. generally accepted accounting principles (GAAP) and is governed or regulated by the Financial Accounting Standards Board (FASB). Some of those financial statements include: Statement of Financial Position, Statement of Activities, Statement of Functional Expenses (The FASB does not require the statement of functional expenses for every nonprofit, however it is encouraged), Statement of Cash Flows, and Notes to Financial Statements. Even though Nonprofits are exempt from paying taxes, they must still follow basic reporting rules set up and maintained by FASB. Keeping up
When joining a new organization, understanding its structure, needs and goals can be tremendously beneficial for short- and long-term success. Two of the major organizational structures, nonprofits and for-profits, have different missions, target audiences, and problem-solving strategies. Students with a Master of Public Administration degree may find opportunities for roles within either organizational structure, so it’s important to recognize the key differences between the two.
1. Purpose
All companies have a distinct purpose, but this is where the difference between a nonprofit and a for-profit is the starkest. While for-profit organizations may have a variety of goals, their primary mission is to generate profit and develop effective products and services that are valuable to consumers. Companies develop products and services that either directly solve a problem or increase overall efficiencies, such as the case with mobile phones or autonomous vehicles. A nonprofit, by contrast, doesn’t prioritize profits and is instead dedicated to promoting a social cause or advocating for a particular standpoint. Examples of nonprofit services often include assisting with basic human and environmental needs such as food, water, education, endangered species, forests and wildlife. These services strive to solve important, potentially life-threatening problems and issues. Therefore, success for nonprofits is measured based on an organization accomplishing its philanthropic mission.
2. Funding
One of the most important aspects of running an organization is establishing a consistent method for funding projects and operations. For-profit organizations tend to fund their initial efforts through bank loans, local investors and revenue generated from sales. If a company’s product or service is considered to have a high potential market value, then they may have the opportunity to receive funding from national or global investors, such as angle investors and venture capitalists. Nonprofits often take a different approach by seeking out private donations of time and money, corporate sponsorships, and government grants, among others. Crowdfunding, a form of online fundraising, has also become a popular method of funding for nonprofit organizations as of late.
3. Diversity of Audience
For-profit companies can have a much more defined target audience than that of a nonprofit. In a for-profit, the company seeks to reach and establish a relationship with consumers who will purchase their products/services to help generate revenue. This relationship creates a continual feedback loop, allowing the company to increase its revenue and expand its offerings to reach new target audiences. Rather than delivering a product or service directly, nonprofits are typically approaching their audiences with a message about a product, service or action. Nonprofits must reach a more diverse audience which can include volunteers, donors, corporate sponsors, and the general public. Due to this broad audience, nonprofits must carefully consider the interests of each segment of their audience.
4. Leadership
The executive leadership of a for-profit company is typically quite clear. Whether it’s a privately held small-business or a large corporation with boards and stakeholders, leadership responsibilities are distributed amongst a select group of individuals. These individuals are considered not only leaders, but also have a stake in the financial success of the organization, which often results in incentives such as bonuses and profit sharing. Due to this, for-profit leaders are primarily concerned with profit and increasing revenue for the organization. By contrast, nonprofit organizations tend to be led and directed by a board of directors who guide the future of the organization without possessing direct financial ownership. The board can be anywhere from 25-30 members to upwards of 100 members. While not concerned as much with financial success, the leadership does have to balance financial concerns alongside social and/or environmental issues. In this case, leadership meeting agendas tend to include a wide array of topics such as funding for upcoming projects, social climate, environmental concerns, organizational performance, fundraising, social and political policies, and potential community concerns that need assistance or funding.
5. Organizational Culture
The differences in a mission can lead for-profit and nonprofit organizations to establish two distinctly different organizational cultures. Due to the goal of financial gain, the culture within for-profit organizations tends to focus on finances and business metrics, such as key performance indicators (KPIs). Employees are also encouraged to be innovative with the creation of new products and markets, all of which can help increase short- and long-term revenue for the company. The culture within a nonprofit is often more community-oriented, as employees are often asked to address and solve problems that have little financial incentive (ex. advocating
against deforestation). With this community-oriented culture, it’s common to see employees of non-profit organizations advocating for the organization outside their work schedule. This could be attending an evening fundraising event or handing out educational resources to local businesses on the weekend.
6. Taxation
Typically, nonprofits are registered as a 501(c)3 organization, which means that they are able to provide their services as a public good without rendering a portion of their earnings back to the government. Likewise, individuals and companies donating to these organizations are able to write off their contributions as tax-deductible. For-profit companies are not able to benefit from tax exemptions and must pay taxes as the law requires.
7. Staff
The workforce of a nonprofit can be wholly different than that of a for-profit corporation. While a for-profit corporation will consist mostly of paid employees and interns, a nonprofit typically relies heavily on volunteer staff. This element links up with many other aspects of a nonprofit company, as these volunteers will also frequently be on the front line representing the nonprofit organization’s mission to potential future donors.
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As the nation’s oldest private military college, Norwich University has been a leader in innovative education since 1819. Through its online programs, Norwich delivers relevant and applicable curricula that allow its students to make a positive impact on their places of work and their communities.
Norwich University’s online Master of Public Administration program is a comprehensive, multi-disciplinary program that helps produce graduates with the skills needed to effectively manage a demanding and evolving industry. Our rigorous curriculum helps provide you with an all-inclusive study of organizational management concepts, decision-making processes, strategic planning, and fiscal management.
Sources
Non Profit Organization Vs. Profit Organization, Chron
Two Basic Types of Organizations: For-Profit (Business) and Nonprofit, Free Management Library
The Best Part of Running A Business Over a Non-Profit is The Constant Direct Feedback, Business Insider
Compiled and Written By TopManagementDegrees.com Staff
As their names indicate, nonprofit and for-profit businesses vary greatly in some aspects of their operation and most definitely in the overall purpose of their existence. As the Houston Chronicle's James Green writes, "While the aim of for-profit organizations is to maximize profits and forward these profits to the company's owners and shareholders, nonprofit organizations aim to provide society's needs. Non-profit organizations have no owners. Instead of maximizing profits, which means maximizing revenues while minimizing costs, they are more concerned with ensuring the revenue is greater than costs. This ensures that the nonprofit can still provide society's needs." Another key element that makes a nonprofit organization different than a for-profit is that the company's income is never to be distributed to any owners "but is to be recycled back into the nonprofit corporation's public benefit mission and activities."
Besides these basic differences in organization and purpose, there are several more technical areas worth mentioning when discussing the differences between nonprofits and their for-profit counterparts. While for-profit organizations are responsible for paying taxes based on their net income, nonprofit organizations are exempt from paying income tax. Since a nonprofit's goal is to make the world a better place and invest time, resources, and funds into the community, the government credits nonprofits with benefits in this way. While nonprofits are not required to pay taxes on net income, they are responsible for state and property taxes.
Another difference between a nonprofit and for-profit organization is that a for-profit will put together an income statement each quarter. Income statements are prepared in order to assess a company's financial performance four times each year. Instead of income statements, nonprofit organizations will typically provide its donors and the general public a statement of activities which will include all revenues, expenses, and plus net assets. The other resource a nonprofit depends on is a quarterly balance sheet listing the owner's equity. Since nonprofit organizations do not operate with owners at the helm, they will typically produce a document which shows the organization's liabilities and assets known as a statement of financial position.
Business professionals desiring to make a difference in the world will often take positions in nonprofit organizations, and many times find the best way to influence and direct meaningful work is pursuing a career in nonprofit management. With so many of the best business schools in the country now offering online Master's in Nonprofit Management, it has never been easier to find a degree that offers convenience and excellent training in this field. The College of Humanities and Sciences at the University of Montana now delivers an impressive 36-credit hour online Master's of Public Administration with a Nonprofit Administration Track. This program has been designed to "prepare students for administrative careers in nonprofit agencies by satisfying the knowledge and skill requirements of both pre-career and mid-career students." Electives within this high-quality degree include Introduction to Nonprofit Administration, Advocacy and Public Policy, Nonprofit Board Management, Nonprofit Grant-writing, and Nonprofit Marketing and Social Media.
This is just one example of a stellar online graduate degree with a focus in nonprofit work. Business leaders desiring to make a difference will find that working for a nonprofit organization can be a satisfying career move.