A question I received recently is a familiar one:
How can I best explain to a non-accountant how we can have a net profit and retained earnings for a not-for-profit organization?
I think the confusion here lies with the term “not-for-profit.” Charitable / Nonprofit / Not-for-Profit organizations are not organized to make a profit for a group of owners or shareholders. They are organized to *do* some kind of charitable purpose. They are mission-driven organizations, not profit driven.
In order for an organization to do its work and carry out its mission on an ongoing basis it must generate more income than the expenses it incurs. It must make a profit. Any organization, either a for-profit or a nonprofit, that does not take in more money than it spends will fail in the end.
The net profits of the charitable organization are retained by the nonprofit and used to further its mission by expanding programs, hiring additional staff, training staff, upgrading equipment or even creating a reserve account. The net profits of a charity are not distributed to the owners as they would be in a for-profit business.
Does that help?
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