Fiscal Health & Sustainability

In general terms, the corporation creates a product or provides a service, and competes in a marketplace where price, quality, cost and competition are key drivers. To perform well over the long haul, research and development must be funded and contribute to better products and services downstream. Ongoing market surveys are used to determine whether to increase or decrease production, with additional research used to determine ways to produce a more cost‐efficient, higher quality product/service to entice consumers from competitors.

To respond to an economic downturn, a for‐profit entity forecasts the impact on its sales and adjusts the manufacture and delivery of the product/service, usually through cost reduction, pricing actions, and even increased marketing expense. Boards may decide to merge operations, sell divisions or the company as a whole, or cease operations as a means of protecting their investment.

Consumers (End Users) also adjust, deciding on how necessary a product or service is during periods of lower income or financial uncertainty, and may defer discretionary purchases, change brands, or go without where necessary.

Nonprofit business model Again very simplistically, a nonprofit corporation is managed by a Board of Directors. But unlike for‐profits, the Board members do not have an “investment” interest in the organization.

(Although members often make substantial donations, they do not expect a financial return on those gifts).

Shareholders include the community overall, specific populations served by the nonprofit, government, donors, and more – all of which have an interest in the organization but do not have governance authority. The organization produces a product (usually a service).

But unlike a for‐profit, the End User (client/recipient) of the product or service is not the party paying for it (or if he or she does pay, it is typically at a subsidized rate). Most nonprofit revenue comes from foundations, individual donors, or government funds, often through contracts.

As in a for‐profit model, the End User and the shareholders (the community) determine whether the product/service is a necessity or discretionary. But donors play a critical role in this decision as well, and this becomes very important in an economic downturn.

Donors can specifically direct or exclude which expenses they wish to fund. For example, many individual donors and foundations will restrict their funding to program costs only ‐‐ they will not fund overhead, research or marketing. Since a nonprofit’s operations and cost structures are in some ways much more transparent than those of for‐profits, it is easier for the donor to be selective in how his or her contributions are used. As a result, many nonprofits find it ____________________________________________________________________________________________________ The Philadelphia Foundation It Matters… July 2010 8