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here's a society thing about nonprofit productive way my goal tonight is to help you to think about nonprofits in a different way in the hope that many of you will consider working in the nonprofit sector in your careers or someday start a nonprofit yourself I've been humble over the years when I talk to students like yourself when I talk to executives of corporations where they say well nonprofits are the second best place to work you're going to a non-profit if you can't get a job in a for-profit sector you know it's not the best of the brightest to go into nonprofits it's the other people I'm going to nonprofits this is so incorrect and what are the reasons I hear I hear the reasons well they're always asking for money obviously they don't know how to live within our needs and that shows a complete lack of understanding and why we created the nonprofit sector in the first place or out here while they're always lurching from crisis to crisis you know they're saying I got to do this I got to do that don't they know how to manage well that shows a lack of understanding of the kind of constraints we're putting on this sector it would cause anyone to have to lurch from crisis to crisis or I here I go into their offices and they have old computers they have software that's not up-to-date their offices don't look very nice if they're really such an excellent organization why can't they do things well well that reflects a lack of understanding of what we're imposing on what we require not how we starve remove capital I came to the realization that what we really want from the nonprofits in our world is for them to be reliable providers of useful community needs where a community need is something which the for-profit sector is not able to provide without losing money and of course the de for profit sector Canada New Zealand I came to this realization over the course of the last 25 years in the 1980s I worked in the budget office in New York City ultimately becoming a deputy budget director and there early 1990s I like the executive director of the finance of control board with New York State which was the overseer for New York City so I was involved in all of New York City budget decisions and from 1987 to 1994 New York was in a constant position of fiscal stress started with a stock market crash in 1987 and just as the city was getting back on its feet the u.s. went into a recession in 1991 and pulled New York City down with it but what I saw was the citizens had a keen idea of those services which they needed to be reliable they had to know that they were there whenever the need arose and that you could meet those priorities by deciding what to cut that is the key mission what they really needed was the thing that had to be reliable that had to be the last thing control overboard in the sinking ship but we impose on nonprofits ideas of across-the-board budget cuts which has no sense of priorities the second thing I saw was New York City is required under law to have a three-year operating plan in a 10 year capital plan that forces it to in the future and they use that to see what problems are ahead of them so that they can either avoid the problem or prepare themselves to deal with the problem and that helped them very much to be reliable I also saw the importance of reserves something which New York was not allowed to have in those days reserves are something which give you flexibility which allow you to anticipate problems and you know what it's something we take for granted in the for-profit world we expect them to hire high current ratios strong balance sheets we expect them to have good cash flow but nonprofits we often say you can't have reserves you have to put it into programs so you can't have any extra cash then I was very fortunate to be able to become the chief financial officer of our University and I thought isn't this sweet the richest universe in the United States I'm never going to have to worry about budget issues I'm going to be out whenever anything's anything we need to be done there's going to be money to do it you know what I did what comes because I realized that what makes for successful nonprofit we is more than just money I also saw in me many of you in the university may take this for granted but I saw that in a university you have some departments that are not able to raise money very easily you have other departments were pretty easy to raise revenue and what makes a University work is that book will be the parts of the school that don't bring in money easily are just as central to the University and what one does to make a university work is to try to take monies from those schools and departments even if they don't want to give it away to try to take it and use it to support those other departments and that led me to my epiphany that what it takes for a non-profit to be successful is completely different than what it takes for a for-profit to be successful and the criteria we use to evaluate success in nonprofits needs to be different but we are using criteria that are not appropriate for valuating success and we're imposing values and restrictions that are not mindful of what a successful nonprofit is supposed to be doing which takes me to the key idea I want to talk to you about today is what does it take what is the definition of a successful run profit let's start with the key mission when we talk about nonprofits we're really talking about 501 C 3 organizations which is a section of the IRS Code which exempts those organizations from paying taxes and it allows people who give money to those nonprofits to be able to deduct it from their income taxes and the reason they do that is because a realization that there are some things which our society absolutely needs which the market economy can't provide if you're a student of economics you've heard about externalities external economies and public goods which is one set of these key mission activities of a non-profit on this graph here the non profit before profit world rather lives just on the horizontal dimension if you're on the right-hand side an activity is profitable and if a line of business is on the left-hand side it's unprofitable and you drop it but nonprofits have that second dimension which is mission high mission and low vision high mission is something which is absolutely needed by our community and this nonprofit provides it in a way that nobody else can or in a quality that nobody provides and society says we have to have it but it's something for which if you do it well you must lose money now many people will say well that's why they do fundraising right well here's some facts I want you to be aware of ing to IRS data over the last 25 years there has never been a year in which contributions were more than 25 percent of nonprofit revenues that means contributions will move that key mission only one quarter of the way towards breaking then you say raise money having doubted investment income has never exceeded five percent of nonprofit residence that means those two things together would only move you one-third of the way towards breakeven so what would happen if that's the only thing you did what would happen if all the hospital had was an emergency room and trauma center where you have to be prepared for the worst possible accidents 24/7 for most of the time you just get some broken bones and some coals but we weren't to be there all the time what happens in the nonprofit sector is they have to do other activities because 70% of nonprofit revenues are no different from the for-profit sector they do activities that basically charge and bring it in what makes a nonprofit work is they have these other activities which are the letters o on this correct now there's some things that are not quite as central to mission so they can tolerate only a small loss but most of those activities are profitable and by doing those activities they can take the profits and use it to cover the license of that key mission which we want and the for-profits editor cannot provide but it's not enough just for those profitable activities that just pay for the key mission the overall organization has to be profitable yes nonprofits have to be profitable the only difference between a for-profit and a non-profit is not whether you earn profits but what you do with those profits a non-profit uses its profits to sustain the key mission but we have to go back to reliability on this graph I want to kind of give you a sense of what does rely of themI and then it slopes up to the right to reflect inflation but basically if you're an economist you'd say it's as constant real level of activity this means we want to know that that emergency room is always going to be open we want to know that if something recession happens or they're bad financial circumstances they're not going to close down that emergency room but the reality is this this cycles there has never been a decade in this century or the last that has not had at least one recession what that means is in the next ten years the odds are there's going to be another recession no matter how much we worry about our economy today now if we want stable services you'll see that in a recession revenues fall below that reliable level of services where you see D's on that graph well the only way you can support that reliable level of services is in the recovery where you see surpluses are where revenue above expenses you see an ask for surplus nonprofits needs to have surpluses set aside and reserves so they can sustain that key mission and that leaves the two important lessons one a nonprofit a successful nonprofit needs to be running a surplus and good economy yet oftentimes we look at a nonprofit and say well this one has a surplus that let's just break even we won't give to the one with a surplus they don't need the money but there's a successful one that are trying to be reliable for us and that's what we want and the second lesson is a successful well-run nonprofit must run a deficit in a recession but you know doesn't bother us in the for-profit sector most corporations lost money in 2008-2009 in which a said well as a bad quarter but somehow we often tell our nonprofits they have to balance their budgets which means they have to cut out our reliable services so they can bring it down to the revenue level you know surpluses so a nonprofit really has to live with two personalities it has to be an excellent provider of a key mission activity that must be losing money if it do it does it well because if it tries to break even it won't be providing us what we need in our society or it will be not serving some of our citizens that we want them to serve and it has to be an innovative creator of for-profit businesses in order to create the profitable activities that make it successful and I want to let you know that you are most likely to find these successful profits in your local communities not at the national level and let me give you some examples in my local community which is Columbus Ohio we have a Columbus Zoo the Columbus Zoo has now been rated the number ones though in the United States you may want San Diego with your no no the Columbus Zoo would say that it's key mission is conservation of endangered species no one pays for that you lose money but they say that's what they need to do now they also let us come see the animals that's kind of important not so Skee of their mission but they still lose some money on it but you know what they own a golf course well mission profitable they own a water park low mission profitable they're building a hotel profitable not related to mission and they use that to support conservation of species we have a Botanic Garden they would say their key mission is supporting community gardening and helping to educate people on community gardening and botany they just spent millions of dollars to build a super wedding facility because people will pay a lot of money to have weddings around beautiful plants not mission-related they did it to earn the profit to support their Commission which nobody will pay for we have a YMCA they would say their key mission is to help indigent adult males with housing and job training no one helps adults anymore they only help kids you can't get money to pay for it it's a money loser so you know what they did they built gyms in the well-to-do suburbs all around the city they compete with the for-profit gyms so they could make profits to support their downtown men shelter I could go on and talk about goodwill you could talk about meals wheels all of these are successful nonprofits that follow this kind of business model now I really admire Ted's focus on nonprofits and focus on global issues but you need to be informed about what the successful nonprofit looks like in what it needs to do without that people are going to have mission pressures list impressions of what constitutes success in the nonprofit sector they're going to impose these biases and restrictions compromise what they do we also have to have nonprofit managers understand what they need to do to be successful they need to focus on their high mission but they also need to have profitable activities and I've never run into a nonprofit that didn't do at least three or five activities even in the social setting we've identified how to do profitable activities with the skill gains that they already have I hope at the time I've had today I've given you an idea that the nonprofit sector has challenges that require some of the most skilled people around and I spend much of my time now talking about when nonprofits linked mission to money the mission is so appealing the challenge is so great and the excellence so widespread that we all should aspire to a career in the nonprofit sector thank you you