How Much Profit Do You Really Need?

profitHow Much Profit Does a Nonprofit Need?  This is the question addressed in an article published in the NonProfit Quarterly.  Woods Bowman, author of Finance Fundamentals for Nonprofits: Building Capacity and Sustainability, provides some general guidance on how to calculate the profit rate your organization needs to maintain “status quo.”  Bowman notes, “Some organizations try to avoid steady erosion of quality by investing an amount equal to depreciation, but this is not enough. This tactic only maintains the value of assets at their original cost, which is insufficient, because inflation constantly pushes up replacement cost.”

Therefore, Bowman advises that a rate of inflation be part of the equation.  Here is the formula he gives:

Status quo profit rate = (A / S) * r

A = Assets

S = Spending on Operations

r = rate of inflation

Note that this is for those who use accrual accounting; cash accounting organizations and endowed organizations should check out the article for Bowman’s application to the formula.

The resulting number, Bowman says, is the percentage of an operating budget that managers should set aside for investment.  He is also quick to point out that this number is for status quo and that those organizations with growth goals in mind will need more profit and larger investments.

Bowman also notes this about non-profits looking for more profit: “They can reduce their need for profit by squeezing more productivity out of their assets.”

Check out the article for additional information about capital campaigns and investments, as well as how to determine inflation rates.

 

 

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