Thursday, July 28, 2011
For Profit vs. Non Profit Business Plans (Part Two): Which Is Best For You?
I Know Things Now
While researching business plans this month I came to an important conclusion: Whether you are considering starting a nonprofit or for profit business, if you’re your plan is solid, you should still be able to break even or show a profit. By their very nature, nonprofits are not allowed to show a profit. This is because usually you are giving or donating a large portion of your services to somehow enrich your community and it is why the government gives you the tax breaks. Most arts organizations, it is assumed, are usually going to be nonprofit.
The question I had to ask myself this month was: “If the only way I can make a new arts organization successful, is as a nonprofit, is it really a good idea?”
There are many financial benefits of running a business as a nonprofit. Two of the most obvious are tax breaks or tax-exempt status (if you qualify) and many grants from the government and for profit sector are only geared towards nonprofits. The bottom line: there can be no profit. So then I have to ask, “Is this taking the easy way out?” Sometimes I think there are arts organizations that use nonprofit status as the excuse for not being run better. Is it a bad business plan? Is there no business plan? It can be a great excuse (nonprofit) for poor planning or a poorly run business, letting others pay for bad decisions (in the form of grants and government assistance).
Let me stop here and say that I fully support and understand the necessity of nonprofit companies and the good work they do. There are nonprofits, however, that totally rely on outside assistance to continue to operate. I think this is what needs to change.
For me, I found a more important issue in debating the two types of businesses was personal income and control. If you follow a nonprofit structure by the letter of the law, you cannot run a nonprofit business and profit from it financially. This may mean no paycheck. So unless you are independently wealthy, you must give control of the company to a board of directors if you want to be paid for your services as an employee of the company. There is a huge personal risk here, especially when you are in effect, donating many hours of time, money and your passion.
A nonprofit board of directors, in the best-case scenario, is a group of people that you have assembled because of their passion, drive, knowledge and experience. They are volunteers, donating their time (and often their money) to a common cause. No matter how much you think they support you and your vision, at some point there will be disagreements. Those disagreements could lead to your dismissal. In some cases this might be what’s best for the future of the organization but it could leave you and your vision without a home. If you follow nonprofits in the news, you will find there seems to be an unusually high rate of turn over of the paid leadership.
A good alternative might be to form a for profit LLC or Limited Liability Company. You lose the financial benefits that nonprofits receive, but you can be paid and retain control of the company. Your company can also show a profit.
So back to my question, “If the only way I can make a new arts organization successful, is as a nonprofit, is it really a good idea?” I had to think long and hard about the benefits to the community and why arts organizations are so important. I looked at it both philosophically and financially and came to these conclusions:
• Art is an integral part of society. You can’t wake up in the morning without art somehow influencing your life. Whether its in business, marketing, education or entertainment, the creativity of art is the basic mechanism that drives our interests.
• Changes in society, government and funding for public schools is having a detrimental effect on how future generations will be exposed to, and learn the fundamentals of art. These changes open up the marketplace, at least in the area of education for profitability of a target business.
•Realizing and understanding the importance of art in our daily lives, leads to the assumption that there is a consumer need and desire, thus making a for profit’s ability to be successful a true possibility.
I talked about Guy Kawasaki and William J. Byrnes in my last post. Both men have spent their lives studying and developing ways to build better businesses and make them successful. Both men agree that planning and structure are ultimately the keys to success.
Kawasaki wrote a terrific blog post about writing a successful business plan. In it, he stresses the importance of writing the pitch first and perfecting it before writing the plan. It makes sense, doesn’t it? You are selling an idea, product or service. What is it? Why is it beneficial and who needs it? How can it be profitable? Answer these questions first and then write the business plan for success.
Kawasaki also says the ideal business plan should be 20 pages or less. Eleven pages of crucial information and he allows for 9 pages of what he calls the “fudge-factor”. He says to “make it a solo effort” (usually written by the CEO), “put in the right stuff” and “keep it clean”.
About 6 months ago I worked on writing a team event project as part of my masters’ program. Five people, in different parts of the country, trying to write a business plan for a one-day event. I can describe it in one word: difficult. Not only were we trying to combine five different ideas and perceptions of what the event should be, we also differed in how it would be executed. The end result was 75 rambling pages without a clear focus or voice. Another team of two people wrote a 17-page project, clearer focus and voice and they got the better grade.
Another important factor I discovered was that you have to allow the business plan to evolve. As you research and analyze your market, competition, and plan for execution, you make all kinds of discoveries that can enhance and make your plan stronger. Business plan writing is a long and fascinating process. I used to think that all you needed was an idea and a good budget. It’s not enough. With what I’ve learned, I can’t even imagine trying to start a business or project without a fully analyzed plan that in the very least, increase the chances of real success.
Posted by Jeff Linamen at 6:27 PM