“Not for profit” does not mean “no profit”

We have heard it before and we will hear it again (somewhere, sometime in the future). Many people mistake the term “not for profit” with an organization that does not sell anything at all or that does not have profit. That is untrue, so let’s clear it out.

Companies have profits and those profits can be 1) kept in the company, increasing the value of equity or, 2) paid as dividends to the owners of equity. When paid, the dividends can be in the full amount of the profits or partial as part of the profits is paid as dividend and the rest is kept in the company. If an organization is not for profit it means that in its governance there is not the purpose of paying dividends to equity holders. For instance, associations are not even held by equity holders, so there would not be equity holders to whom to pay dividends. But not for profit organizations can have a profit.

Not for profits organizations can sell services or products

Any organization or company can sell products or provide a service and charge a price for it. Whilst it is true that many not for profit organizations’ operations may be funded by contributions, donations and government subsidies, it is common to see organizations that combine these sources of money with sales of products and services. Hence, organizations can have a revenue stream, just like a regular company.

Not for profits organizations can have profits

Just like companies, NGOs and other types of social purposed associations have sources of income and expenditures. And as you can imagine, it will be extremely difficult to spend exactly the same amount of income. Therefore, these organizations can have profits (or losses). Again, as in normal businesses, organizations must have an organized accounting that asserts the Net Income for each year of operation.

The major difference between a company and a not for profit organization is that, while both have profits, only companies can pay dividends. Not for profit organizations are obliged to accumulate the yearly profits. The organization may use the funds of accumulated profits to reinvest in its operations or to support expenditures in the following years.