NPO (Non-Profit Organization)
A purpose-driven entity dedicated to societal, recreational, pleasure, and other intangible benefits, rather than profit
What is an NPO (Non-Profit Organization)?
NPOs are organizations that focus on specific social causes, serving their members or the public at large. The revenues earned by these organizations often come from donations, fundraising activities, or membership fees. Some may also sell products and services to generate funds to support their objective.
NPOs operate in many sectors, including professional and scientific services, educational services, health care/social assistance, arts, entertainment and recreation, and religious and civic services.
Key Highlights
- NPO (non-profit organization) are organizations that focus on a specific social cause, such as in science, education, health, arts and recreation, and religion.
- Organizations may qualify for tax-exempt status and receive an exemption from income and other taxes.
- Surpluses are not distributed but retained to serve the organization’s members and the community they serve.
How Non-Profits Organize
NPOs in many jurisdictions can have a separate legal identity via statute, or they may incorporate. There is no single definition of this term that is consistent between jurisdictions.
For example, NPOs that meet specific requirements[1] in the United States are often known as charitable organizations. In contrast, Canadian law states that NPOs cannot be charities[2].
NPOs do not have owners as they do not generate profit as a primary goal. In fact, they do not distribute their surplus (i.e., the excess of revenues less expenses). Surplus funds may be segregated and used to further specific objectives. The organizations are accountable to the donors, volunteers, founders, and members for the projects they undertake.
Governments in many jurisdictions, such as the United States, Canada, and the United Kingdom, support the causes advanced by these organizations in many ways. For example, NPOs may be exempt from taxes under certain conditions[3]. They may obtain[4] charitable status and offer tax-deductible receipts for donated capital and assets to attract donors and members.
How Non-Profit Organizations Operate
Non-profit organizations play an important role in shaping the community or communities that they serve. Revenue and cash flow are critical for any organization, including NPOs.
While labor contributions by volunteers may be significant, there are administrative costs to sustain any organization’s daily activities. It is also costly to conduct programs to further the organization’s cause.
Non-profit organizations source funds via donations from individuals, businesses, and foundations. NPOs may also receive sponsorship for specific projects from the private sector and government contributions, as well as generate funds via the sale of merchandise and services.
Overall, revenues collected must pay for goods or services to beneficiaries, financing community projects, administrative expenses (staff salaries, office expenses, supplies, etc.), and fundraising costs.
Non-Profits & Financing
To sustain their mandate, NPOs must be financially stable. As they are reliant on donations, donor engagement is a core function. This function competes for limited resources.
The dynamic between administrative, fundraising, and program expenses is carefully managed for NPOs to succeed in their social purpose. See non-profit business plan for detailed considerations.
NPOs must generate sufficient funds to conduct core programming. As it is challenging to raise funds quickly, they monitor funding gaps that may risk cuts to programs in response to insufficient funds.
NPOs generally have far lower levels of debt than for-profit businesses, as limited repayment options are available to lenders.
Growth in donations, donor retention, and return on fundraising activities are some indicators to monitor an NPO’s financial ability to achieve its purpose. Donors and governments often review program expenses against revenue to assess the efficiency and effectiveness of the NPOs they support.
Non-Profit vs. Not-for-Profit Organization
The terms “non-profit organization” or NPOs and “not-for-profit” or NFPs are often used interchangeably to refer to organizations that do not distribute their profits to shareholders. However, both terms refer to different types of organizations that differ in their scope, size, and activities.
Non-profit organizations (NPOs) are often larger, better managed, and organized organizations that focus on a specific social cause, such as religion, education, environment, research, or a science setting. On the contrary, not-for-profit organizations (NFPs) tend to be smaller in size and focus on members’ sports, hobbies, or special interests.
The definitions of NPOs and NFPs diverge among jurisdictions. A standard and legal definition beyond the generalities above requires research of regional specificities.
Related Readings
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
