Why not-for-profit firms would benefit less from doing strategic planning than for-profit companies?

Many firms do not engage in strategic planning and some firms do strategic planning that is poor and ill conceived. Some of the reasons for this sorry state of affairs in these firms are listed below:

• The first and foremost reason for poor strategy is the lack of experience in strategic management which is due to the paucity of managers and executives with experience and the presence of those who do not understand strategic management.
• The next reason has to do with the poor reward structure in place where success goes unrewarded and failures are punished. Because of this “double whammy” of no recognition when things have gone right and blame game when things go wrong, managers are reluctant to engage in strategic management.
• Because an organization is always firefighting which means that is so embroiled in its internal problems, the top management does not have the time or the energy to engage in strategic management. This is often the case with many firms where the lack of coherence and control in organizational processes means that most of the time is spent on tackling problems rather than preempting problems or solving problems.
• Some firms view strategic planning and strategic management as a waste of time since they are under the impression that they can handle the longer-term imperatives by doing things that they have always done in a particular manner. This is the case with firms that have been in business for generations where the new leaders often think that “if it is not broke, do not fix it”. This mindset precludes them from approaching the future in a proactive manner instead of a reactive manner.
• Continuing in the same vein, many firms, especially those that have been successful see no point in formulating newer strategies since their position is comfortable and they are content with success. Success breeds arrogance as the case of Nokia, which went from market leader to the bottom in a few years time reminds us.
• With experience, many managers think that they can weather any storm because they “have been there, done that”. However, this attitude is counterproductive as planning for eventualities is necessary and formal models of strategy have to be drawn up since experience is not always the best guide. This is especially the case with the modern era where the advent of the digital age has changed the rules of the game.
• Perhaps one of the most important reasons why firms do not engage in strategic management is that they fear the “unknown”. What they forget is that precisely because of the unknown and the unpredictable; they have to plan in advance. Further, the managers might be uncertain of their abilities to learn new skills, of their aptitude with new systems, and their ability to take on new roles. This happens when organizational arteries are clogged because of inertia and a general sense of laziness and ostrich like mindsets.
• Finally, the other important reason why firms and the managers within them do not engage in strategic management is the lack of consensus and differing ideas as to what a good strategy ought to be.

Strategic planning can help a nonprofit achieve its goals. A plan will assist a nonprofit as it evaluates its assets and any challenges it may encounter. A strategic plan will also define the organization's mission, goals and objectives, and will guide the nonprofit as it sets out to accomplish its purpose.

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Define Your Mission

Every nonprofit has a mission. A mission is the reason for the existence of the organization and is the driving force behind the decisions that the nonprofit will make. A nonprofit will define the purpose of the organization in a mission statement. A mission statement should:

• Define the objective;
• Define the beneficiaries;
• Be narrow;
• Be concise.

Gathering input from others -- from others involved in starting the nonprofit, from experts in the field, and from the people the nonprofit will benefit -- can help create a mission statement that others will enthusiastically support.

Create Goals and Objectives

Once the nonprofit has a clear mission, the next step is to create goals and objectives. The broader purpose of the nonprofit can be broken down into more narrow goals. If, for instance, a nonprofit's mission is to help disadvantaged students attend college, specific goals might be to provide scholarships, a tutoring program for high school students, or assistance with college applications.

Based on the goals, a nonprofit can create related objectives. For instance, if the goal is to provide college scholarships, a specific objective could be to provide ten scholarships to disadvantaged students by 2020. Unlike a goal, the success of an objective is measurable.

Do Your Homework

Researching the needs of a nonprofit is an essential part of creating a successful organization. Nonprofit organizations should make assessments about internal and external factors that may contribute to the success or failure of the organization. Nonprofit organizations should consider:

• If other organizations offer similar services in the area;
• How many people will use the service;
• The skills of the staff;
• Whether training of the staff and volunteers is necessary;
• Will the organization receive adequate funding from contributors and grants;
• Whether the nonprofit has the necessary technology to operate;
• What equipment will the organization need to purchase;
• Will people volunteer.

A nonprofit can answer many of these questions by collecting information from surveys or one-on-one interviews.

Strategic Planning

After gathering internal and external information, it is necessary to analyze it by using a strategic planning process. A SWOT analysis is a common way to analyze information. SWOT is an acronym for strengths, weaknesses, opportunities, and threats.

• Strengths: An organization's internal positive assets
• Weaknesses: An organization's internal weaknesses
• Opportunities: Positive indicators outside of the organization
• Threats: Negative aspects outside of the organization

Usually a SWOT analysis is completed as a group, but participants can complete it individually before making comparisons. Using a SWOT analysis helps the organization focus its resources and helps it evaluate its capacity to accomplish specific goals and objectives. The analysis will guide the organization as the nonprofit creates ways to benefit from strengths and opportunities and makes plans to diminish weaknesses and threats.

Create a Work Plan

A nonprofit can also create a work plan, or an action plan, to list specific tasks. The work plan will list objectives and timelines for completing a job. A work plan is a good way to break tasks up into smaller tasks and to track progress. A work plan, for instance, will typically include information about the objective, the length it will take to complete the task, the person responsible for completing the task, and the resources needed.

Assemble the Plan

A finalized plan for the nonprofit can include the organization's mission statement, its objective and goals, its assessment of external and internal factors, a strategic plan, and a work plan. A nonprofit can then create a professional document it can submit to donors by using publishing software to add graphs and illustrations.

Hire a Lawyer to Help Your Nonprofit Strategically Plan 

A lawyer familiar with charitable organizations can help your nonprofit create a viable strategic plan. A business and commercial law attorney can assist with creating goals, objectives, and a path towards your nonprofit's future. 

When you’re starting a business, it’s likely you’ll hear the phrases “nonprofit” and “not-for-profit” thrown around. It’s also easy to assume these two terms mean the same thing. However, nonprofits and not-for-profits are business structures with different tax implications, governance and functions. Both of these entities contrast with for-profit organizations. Here are the ins and outs of what all these terms mean so you can figure out which structure is right for your new venture.

[Read more: Getting Ready to Launch? How to Choose the Right Business Structure]

What is a nonprofit organization?

A nonprofit organization is one that qualifies for tax-exempt status by the IRS because its mission and purpose are to further a social cause and provide a public benefit. Nonprofit organizations include hospitals, universities, national charities and foundations.

[Read more: Education, Partnerships and Community Are Essential to Nonprofit Success]

To qualify as a nonprofit, your business must serve the public good in some way. Nonprofits do not distribute profit to anything other than furthering the advancement of the organization. As such, you will be required to make your financial and operating information public so that donors can see how their contributions are being used. An individual or business that makes a donation to a nonprofit is allowed to deduct their donation from their tax return. The nonprofit, likewise, pays no taxes on any money received through fundraising.

What is a not-for-profit organization?

Similar to a nonprofit, a not-for-profit organization (NFPO) is one that does not earn profit for its owners. All money earned through pursuing business activities or through donations goes right back into running the organization.

However, not-for-profits are not required to operate for the benefit of the public good. A not-for-profit can simply serve the goals of its members. A good example is a sports club; the purpose of the club is to exist for its members’ enjoyment. These organizations must apply for tax-exempt status from the IRS, including exemptions from sales tax and property taxes. That also means that money donated by an individual to an NFPO cannot be deducted on that person’s tax return.

Nonprofit vs not-for-profit organizations

There are four key differences between a nonprofit and a not-for-profit:

• Nonprofits are formed explicitly to benefit the public good; not-for-profits exist to fulfill an owner’s organizational objectives.
• Nonprofits can have a separate legal entity; not-for-profits cannot have a separate legal entity.
• Nonprofits run like a business and try to earn a profit, which does not support any single member; not-for-profits are considered “recreational organizations” that do not operate with the business goal of earning revenue.
• Nonprofits may have employees who are paid, but their paychecks do not come through fundraising; not-for-profits are run by volunteers.

Nonprofits are granted 501(c)(3) status by the IRS. NFPOs are also governed by IRS tax code section 501(c), but depending on their purpose they could fall under a different section, like section 501(c)(7).

What is a for-profit organization?

A for-profit organization is one that operates with the goal of making money. Most businesses are for-profits that serve their customers by selling a product or service. The business owner earns an income from the for-profit and may also pay shareholders and investors from the profits.

Whether you decided to start a for-profit, not-for-profit or nonprofit, the first steps to creating your entity are the same. Start by filing for a business entity in the state in which you wish to run your operations. Your business entity might be a corporation, LLC, sole proprietorship or partnership.

Once the entity has been formed, you will apply for an Employer Identification Number (EIN) with the IRS. It’s during this step that you will select your tax-exempt status using Form 1024 if you wish to run as a nonprofit.

Some businesses start as one type of legal entity and later decide to convert to another.

Can you change your legal entity?

Some businesses start as one type of legal entity and later decide to convert to another. This is possible, but it’s a little complicated depending on the types of entities involved.

From nonprofit to for-profit

There are a few reasons why you may wish to change from a nonprofit to a for-profit. Maybe you believe you can get better access loans or other funding by becoming a for-profit. Or maybe you prefer to operate without the regulations that govern nonprofits.

Regardless, once you’ve carefully considered this option and all shareholders are in agreement, you will need to notify the IRS by writing a "statement of nonprofit conversion." This statement will include:

• The reason for nonprofit termination;
• A certified copy of a liquidation plan;
• The fair market value of the organization;
• A list of all asset recipients if assets will be distributed.

You will also need to contact your state and local representatives to fill out any forms required in your specific jurisdiction.

From for-profit to nonprofit

Converting a for-profit to a nonprofit is a little more difficult, as the IRS wants to discourage businesses from making this move to avoid paying taxes. It can be done, however, through a process that isn’t so different from starting a nonprofit from scratch.

“While you may be able to retain the for-profit organization name for use by your nonprofit, a nonprofit organization requires you to use the money you raise to suit a purpose other than distribution to shareholders or business owners, and it needs to fulfill the mission and goals of the nonprofit,” explained Small Business Chronicle. “Transitioning to a nonprofit organization requires you to do some planning prior to registering the nonprofit with the state in which it operates.”

This transition includes writing a mission statement, establishing bylaws, and filing articles of incorporation with your Secretary of State, among other things. It’s at the articles of incorporation step that you will need to let the Secretary of State know you’re keeping the same name as your existing for-profit.

Which legal entity is the best?

Ultimately, the legal entity that’s right for your business depends on your goals. As one entrepreneur, Jane Chen, outlined in Harvard Business Review, there are pros and cons to each entity.

“A for-profit can raise money from private investors, for which it must give equity or dividends to shareholders; ultimately, a return on investment is expected,” she wrote. “A nonprofit, on the other hand, can seek donations from individuals, foundations and corporations. Such stakeholders generally expect a ‘social return’ on capital.”

There’s no one-size-fits-all when it comes to establishing a legal entity for your business. And, the good news is you can always change your entity as your business grows. Speak to an expert who can help you choose an entity that optimizes your tax deductions while serving your overarching goal.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published April 20, 2021