Can Nonprofits Make a Profit? Understanding Financial Sustainability

Have you ever heard someone say that nonprofits shouldn’t make a profit? It sounds counterintuitive, doesn’t it? The reality is that if a nonprofit operates year after year without generating a surplus, it risks financial instability. Without profits, there’s no opportunity to build reserves, manage unforeseen events, or support long-term growth. And if recent years have taught us anything, it’s that unforeseen events are inevitable.

So, how much profit can a nonprofit make? The answer is simple: as much as it needs to sustain its mission and ensure long-term success.

Why Nonprofits Should Strive for Financial Surplus

For many nonprofits, breaking even can feel like an achievement. However, constantly operating at zero leaves organizations vulnerable to financial crises. Board members and donors may question why a nonprofit seeks funding if it already has reserves, but this perspective is short-sighted. Healthy financial reserves enable nonprofits to:

• Build cash reserves for emergencies.
• Pay expenses on time.
• Focus on mission-driven goals without the distractions of financial stress.

At Meaden & Moore, we encourage nonprofits to view themselves as businesses. A sustainable nonprofit operates efficiently, effectively, and profitably—ensuring it can meet both immediate needs and long-term goals.

The Importance of Sustainability

The term "sustainability" means more than just staying afloat. It’s about enduring, supporting, and maintaining operations over the long term. A sustainable nonprofit can:

• Continue providing essential services to the community.
• Build trust with donors who want to invest in a stable, impactful organization.
• Avoid the panic and desperation that arise during financial difficulties.

Donors are more likely to support organizations with strong financial health because they want to know their contributions are making a lasting difference—not just plugging holes in a sinking ship.

How Nonprofits Can Build Financial Sustainability

Creating financial sustainability requires a deliberate approach. Here are three key steps:

1. Budgeting

Developing an annual budget provides a roadmap for the organization’s financial goals. To create an effective budget:

• Review actual results from prior years and align them with strategic goals.
• Use a format that includes monthly and year-to-date actuals, along with comparisons to the budgeted amounts.
• Ensure the budget is reviewed, approved, and balanced before the fiscal year begins.

2. Monitoring

A budget is only effective if it’s actively monitored. Regular tracking and analysis can help nonprofits stay on course. Key monitoring practices include:

• Comparing actual results to the budget on a monthly or quarterly basis.
• Including variance columns in internal financial reports to highlight over/under budget areas.
• Reviewing significant variances (both positive and negative) and providing explanations.
• Involving a finance committee to oversee reviews and report findings to the board of trustees.

3. Taking Action

Budgeting sets the goals, monitoring tracks progress, and action ensures success. Once issues are identified, corrective measures must follow. Examples include:

• Expanding a program when additional restricted funds are received.
• Reducing general expenses if annual contributions fall short of targets.

Taking timely action based on financial insights is critical to sustaining the organization’s mission.

Building a Sustainable Future

Strong financial health is built on a foundation of best practices, including clear reporting, effective communication, engaged governance, and timely decision-making. By combining these elements, nonprofits can create a realistic budget, monitor progress, and take corrective action to ensure long-term sustainability.

Use this opportunity to evaluate your nonprofit's financial sustainability. At Meaden & Moore, we specialize in helping organizations strengthen their financial practices and plan for the future. Contact our team to learn how we can support your mission and ensure your nonprofit is built to last.