The small business failure rate and nonprofits have a lot in common. Hear me out for a moment. Nonprofits are, in fact, small businesses. Other than the fact that they’re tax-exempt, they share many things in common. As an example, they need to operate in good financial ways. And, although they don’t have customers, nonprofits have constituents or audiences. As an example, the people served, donors and supporters are all critical to the running of a good organization. Nonprofits have boards and leaders, as do small businesses. And, they also do other activities like companies. For instance, other activities include marketing, fundraising (e.g., sales), administration. Like small businesses, charities should concern themselves with nonprofit failure.
- 80 percent of companies survived into 2015.
- 70 percent were still around in 2016.
- 62 percent were in operation in 2017.
- 56 percent operated in 2018.
So, you can see the small business failure rate pattern with a bit over half of the companies still operating four years after they opened their doors.
What the small business failure rate has to do with my nonprofit?
A study done by Cambridge Associates took a starker view at the small business failure rate. It suggested that about 6 in 10 small businesses fail. Further, according to a report on the Guidestar site, about 50 percent of groups have less than one month of operating revenue. And, to stem the insolvency of these nonprofits would take $40 to $50 billion. What’s more, dire financial straits affect not only small nonprofits but also large ones.
So, now do I have your attention on small business failure and nonprofits? Presuming you agree that nonprofits are businesses, let’s discuss some of the causes of nonprofit failure.
Nonprofits aren’t trusted
I’ve often said that nonprofits are not the only game in town anymore. For instance, there was a time when if people wanted to do something charitable, the natural place to look was with nonprofit groups. That’s no longer the case. As I observed earlier this year about charitable trust, a third of the population does not think that nonprofits can be trusted. And, in today’s world, charities are not the only ones supporting social good. There are social enterprises, B Corporations, and companies that include social good metrics as part of their business model.
Nonprofit failure and lack of value
Let’s look at something else that is important. A reason why nonprofits aren’t trusted is that they don’t offer value. So, let’s take a look at that means. When my team and I created or developed our social enterprises, we sought to answer the following singular question. What is our value in the community?
In other words, we saw a need. Nonprofits had to raise money without asking for it. The world needed to repurpose shoes. And, micro-entrepreneurs in developing nations needed the shoes we shipped to create paths out of poverty. Meaning, we understood our value to our nonprofit partners. And we also knew what we meant to small business owners in developing countries and the environment. Can you answer why anyone should support your nonprofit as opposed to the one down the block doing the same thing? Can you detail what your value is to your community, including your donors?
Small business failure and nonprofits
Finally, here’s another critical reason why nonprofits fail. They don’t see themselves as businesses, and that’s a mistake. Like businesses, they need leadership, strategy, and planning. They also need financial capital, infrastructure, and execution of the plan. As an example, nonprofit fundraisers don’t see themselves as salespeople. But they are selling. Sure, they might not be making transactional sales where a customer walks into a store and buys a pair of shoes. Instead, what they are doing is trying to build long-term relationships with prospects. Still, they are selling an idea to their supporters for fundraising dollars. Nonprofit fundraisers have to provide the reasons why donors should support their cause.
In short, we understand that people who are in the nonprofit sector have good intentions. But, having a good heart is not enough. Nonprofit failure happens when good people don’t see how to operate an enterprise that grows and is sustainable. So, nonprofit leaders and founders should first seek to understand how to build a good business and why. They should do this before getting involved in the work for social good.
Author of “Not Your Father’s Charity: Grip & Rip Leadership for Social Impact” (Free Digital Download)
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