Nonprofit Algebra: The three equations you must balance to run your nonprofit successfully

Last year, SeaChange Capital Partners released a report called Risk Management for Nonprofits. Overall, the reaction was positive and our critics’ comments fell into three major categories: The financiers suggested that financial health and sustainability is the most important risk-related issue facing nonprofits. Others argued that programmatic impact is the most important issue. Our last cadre of critics said that passion, motivation and mission orientation are paramount.

But SeaChange doesn’t think risk is the most important issue for one simple reason: There is no single issue that is most important. Running a nonprofit requires solving three equations simultaneously. It makes no sense to ask which one is the most important because you need to solve all three at once to discover a solution, if there is one.

1. Viability: Revenues are greater than expenses

2. Effectiveness: Programs are making an impact

3. Worth: Things are being done in the right way

Financiers do have a point that a nonprofit must solve the viability equation because the opposite of viability is extinction. And financiers can sometimes be smug. Their favored equation is easy to understand, so they don’t waste energy bickering among themselves about definitions or measurement – everyone knows about revenue, expenses and cash.

The other critics are also right that a viable organization delivering ineffective programs is completely pointless. But they dilute their argument because of internecine disagreements about what “effective” means, what constitutes “evidence” and questioning the proper trade-off between cost and impact. Some advocates want effective programs; others want the most effective programs; still others want the most cost-effective programs. These critics tend to ignore programs such as advocacy, medical research as well as arts and culture that don’t fit easily within their favorite methodologies that are oriented toward direct services providers. And they find it galling that financially viable organizations with ineffective programs exist, while effective programs without viable delivery organizations don’t. But life isn’t always fair.

The last group of critics believe nonprofits must be worthy of their special privileges: tax advantages, volunteers, passionate staff, etc. Nonprofits must do the right things – in the right way – for the right reasons. This might mean serving the toughest populations, being small and/or community-based, having a diverse board and staff, not spending too much on senior management, overhead or fundraising. They can seem utopian with their dreams of a better world – more unrestricted funding, no managed care, less measurement – yet we cannot deny the essential truth they speak: Worth is the nonprofit sector’s only essential quality. The application for 501(c)(3) status is a statement of “worthiness” and the board’s duty of loyalty is an ongoing commitment to maintain this worth. In areas where viability and effectiveness are the only considerations, nonprofits should probably cede the terrain to for-profits companies that will probably surpass them anyway.

It’s hard to be a viable, effective and worthy nonprofit that has solved all three equations. Sometimes there is no solution. Sometimes there was a solution, but circumstances have changed. And in a philanthropic market with finite resources, nonprofits are in a Darwinian struggle not merely to be viable, effective and worthy, but to be more viable, more effective or more worthy than the competition. So a great nonprofit leader will have to be focused on the finances, the impact and the mission.

Most people aren't constructed that way. Most of us pledge principal allegiance to one camp while acknowledging – even if grudgingly – that the other two are equally important.

Great leaders also recognize that doing hard things is a team sport, so they recruit employees who specialize in one of those three areas. They do this despite knowing that these camps speak different languages, favor different equations and can get into squabbles.

They consider it all a necessary part of the messy process by which nonprofits make progress.

John MacIntosh is a partner at SeaChange Capital Partners, which provides funding, advice and insight to help nonprofits complete transactions that increase their impact.