2.2: Differentiate between For-Profit and Not-for-Profit Organizations

For-Profit Organizations

Take a moment to think about the many different types of businesses you come into contact with on a typical day. As you drive to class, you may stop at a gas station that is part of a major national oil company and grab lunch from a fast food chain such as Taco Bell, McDonald’s, or the neighbourhood pizza place. Need more cash? You can do your banking on a smartphone or another device via mobile apps. You don’t even have to visit the store anymore—online shopping brings the stores to you, offering everything from clothes to food, furniture, and concert tickets.

A business is an organization that strives for a profit by providing goods and services desired by its customers. Businesses meet the needs of consumers by providing medical care, automobiles, and countless other goods and services. Goods are tangible items manufactured by businesses, such as laptops. Services are intangible offerings of businesses that can’t be held, touched, or stored. Physicians, lawyers, hairstylists, car washes, and airlines all provide services. Businesses also serve other organizations, such as hospitals, retailers, and governments, by providing machinery, goods for resale, computers, and thousands of other items.

Revenue is the money a company receives by providing services or selling goods to customers. Costs are expenses including rent, salaries, supplies, transportation, and many other expenses a company incurs from creating and selling goods and services. For example, some of the costs Microsoft incurred by developing its software include salaries, facilities, and advertising. If Microsoft has money left over after it pays all costs, it has a profit. A company with costs greater than revenues incurs a loss. When a company such as Microsoft uses its resources intelligently, it can often increase sales, hold costs down, and earn a profit. Not all companies earn profits, but that is the risk of being in business. Risk is the potential to lose time and money or otherwise not be able to accomplish an organization’s goals. For example, the Canadian Red Cross faces the risk of not meeting the demand for victims of disaster (patients who need blood) if there are not enough blood donors. Businesses such as Microsoft face the risk of falling short of their revenue and profit goals. In Canadian business today, there is generally a direct relationship between risks and profit—the greater the risks, the greater the potential for profit (or loss).

The owner or shareholders of a business are not the only people who benefit from the business’s earned profits. A successful business provides employment opportunities, goods and services people need and want, tax payments to the government, and spends money buying resources, which stimulates the economy.  Socially responsible firms contribute even more by adopting policies that promote the well-being of society and the environment while lessening the negative impacts on them.

Not-for-Profit Organizations

Not every organization that generates revenue and pays expenses is considered a for-profit business. Not all organizations strive to make a profit. A not-for-profit organization is an organization that exists to achieve some goal other than the usual business goal of profit at all costs. Often, these organizations serve communities through social, educational, or political means. Organizations such as universities and colleges, hospitals, environmental groups, and charities are not-for-profit organizations. Charities such as Habitat for Humanity, the United Way, the Canadian Cancer Society, and the World Wildlife Fund are not-for-profit organizations, as are most hospitals, zoos, arts organizations, civic groups, and religious organizations.^[1] Over the last 20 years, the number of not-for-profit organizations—and the employees and volunteers who work for them—has increased considerably. Government is our largest and most pervasive not-for-profit group.

Like their for-profit counterparts, these groups set goals and require resources to meet those goals. However, their goals are not focused solely on profits. For example, a not-for-profit organization’s goal might be feeding the poor, preserving the environment, increasing attendance at the ballet, or preventing drunk driving. Not-for-profit organizations do not compete directly with one another in the same manner as, for example, Ford and Honda, but they do compete for talented employees, people’s limited volunteer time, and donations.

The boundaries that formerly separated not-for-profit and for-profit organizations have blurred, leading to a greater exchange of ideas between the sectors as for-profit businesses are now addressing social issues. Successful not-for-profits apply business principles to operate more effectively. Not-for-profit managers are concerned with the same concepts as their colleagues in for-profit companies. These concerns include developing a strategy, budgeting carefully, measuring performance, encouraging innovation, improving productivity, demonstrating accountability, and fostering an ethical workplace environment.

In addition to pursuing a museum’s artistic goals, for example, top executives manage the administrative and business side of the organization, which can include human resources, finance, and legal concerns. Ticket revenues cover a fraction of the museum’s operating costs, so the director spends a great deal of time seeking major donations and memberships. Today’s museum boards of directors include both art patrons and business executives who want to see sound fiscal decision-making in a not-for-profit setting. Therefore, a museum director must walk a fine line between the institution’s artistic mission and financial policies.