Not-for-profits must make a profit

Thursday, 01 September 2016

Almost half of Australia’s not-for-profit (NFP) organisations expect to only ‘break-even’ or make a loss over the next three years.

This is one of the key findings of the 2016 NFP Governance and Performance Study conducted by research firm BaxterLawley on behalf of the Australian Institute of Company Directors (AICD).

More than 1,800 directors from a diverse range of NFP organisations participated in the study, which was sponsored by Commonwealth Bank, making it the largest survey of not-for-profit governance in Australia.

“There can be no doubt that NFPs do need to make a profit,” said John Brogden, Managing Director & Chief Executive Officer of the AICD.

“Profit is the foundation of building the long-term confidence needed for an NFP to achieve its purpose.”

“It’s alarming that some directors are saying the capacity of their organisation to meet their purpose will, in real terms, shrink moving forward. Directors and boards need to seriously consider their roles and drive the cultural change necessary to support the long-term financial strength of their organisations,” said Mr Brogden

However, 31 per cent of respondents said their organisation had a profit margin of more than six per cent in the past financial year.

“Many NFPs are not just surviving, but thriving. However, responses to the survey indicate that directors’ understanding of their roles as financial stewards, is highly variable,” said Mr Brogden.

“NFPs making a profit can be challenging concept for government and the broader community, but without long-term financial strength, the sector will not be able to deliver vital services.”

Other key findings of the survey include:

  • The use of performance data to measure organisational success is gaining momentum;
  • Rates of mergers have not changed over the past year. Just over a third of directors (35 per cent) reported that their organisation had discussed a merger in the last 12 months;
  • NFP leaders have a negative perception of the sector. Despite 74 per cent of directors believing their NFP is efficient, only 32 per cent believe this to be true of the broader NFP sector; and
  • Only 15 per cent of respondents were paid a director’s fee and 70 per cent are spending more than two days a month performing their duties.

The study also highlights the relationship between the NFP sector and governments across Australia and the need for a genuine partnership approach.

Data from the study shows that:

  • More than half of directors believe that Federal, State and Territory Governments are not consistent in their approach to contracting for services;
  • Two-thirds want more stability in government policy; and
  • 55 per cent want the administrative burden reduced.

“We need to have a new conversation with governments about the way they fund and regulate the sector,” said Mr Brogden.

“Funding contracts are often short-term and prescriptive. Most stipulate how funds are to be spent and some even require that NFPs account for any profit they make or, worse, return unspent funds to government.”

“Government is rightly asking for improved governance among NFPs, but constricting their ability to achieve good governance through archaic funding practices,” he said.

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