Nonprofit Profitability Continued - The Most Profitable Sectors

As a follow-up to my previous post about the most profitable non-profit organizations, I was curious to see which types of nonprofit organizations were, as a whole, the most profitable. So, I put together the table below using the IRS's data on 2013 filings by nonprofit organizations with a 501(c)(3) designation. Categorizations are based on self-reported NTEE codes. 

The Most Profitable Nonprofit Organizations in America

I've recently become interested in examining the performance of nonprofits that are profitable. Typically, organizations seek nonprofit status because their mission matches with one of those defined under the nonprofit tax code and because they believe they will be more financially successful if they are able to offer tax advantages to contributors. In other words, there is likely a shortfall between the revenue that they make from their programs and operations, i.e. earned income, and that which they make from charitable contributions. The idea that nonprofit organizations should be run for a profit is rather controversial, with arguments against often suggesting that this motive runs contrary to the social mission that nonprofits supposedly have.

However, I'm willing to suggest that that shouldn't be the case. One of the refrains I've heard in fundraising is that there are only so many donor dollars to go around. As a result, nonprofits feel like they are competing with one another for slices of a pie that is always the same size. To some degree, this is correct: nonprofit donations in the U.S. as a percentage of income have been, more or less stagnant for over three decades. But why should we assume that the pie has to stay the same size year after year? Because nonprofits don't innovate. From Schumpeter onward, innovation has been widely viewed as a driver of economic growth. How do you avoid competing with the same organizations for slices of the same pie? You make the pie bigger and you create new markets. How do you do this? You develop new products and services that people want. 

The reward of doing this is profit. Profits allow organizations to grow—to hire more people, to invest more money in research, to innovate. In the for-profit world, that means more money eventually going back to shareholders. In the nonprofit world, it means more money that can be put to use serving an organization's mission. 

Innovation > Demand > Profit > Growth > Mission

If your mission is to serve a particular constituency or cause, the best ways to ensure that you will be able to fulfill that mission in the future are to raise an endowment or to develop a sustainable, profitable business model. 

I was curious to know which nonprofit organizations actually have decent profit margins, so I took a quick look at 2013 990 data to find out. I set minimum thresholds for both revenue and expenses. Organizations had to have at least $1mm in annual program revenue and at least $100k in expenses to make my first calculations. I started by calculating program margins for U.S. nonprofits, using the program revenue and total expense lines from their 990 forms. 

The first thing I noticed was how many organizations that receive tax-exempt designations from the IRS are not the sort that we typically think of as nonprofits. There are employee unions and pension funds. Organizations with a single funder and retirement trusts. The NFL's player health reimbursement account and the committee to bring the Super Bowl to New York. My initial list was not particularly useful to me. So, I added some further restrictions. Organizations that appear below need to have 501(c)(3) designation, and they need to employ at least 10 people. These restrictions are a bit arbitrary, but they do help cut out some of the noise. 

One of the problems with calculating program profitability is that the line between what counts as program revenue and what counts as contributions isn't always obvious. For example, when you purchase a membership to the MoMa, most of the cost is considered a tax-deductible contribution, even though you would think that what museums sell is access to their collections. So, I went on and calculated total profitability in the subsequent tabs, which accounts for all revenue streams, including investments, contributions, and grants. The problem with that is that organizations often receive large one-time contributions that don't really reflect the ongoing health of their business. For example, for the most recent fiscal fear reported by SF MoMa, their revenues were up by about $150mm over the previous year. So, it would be useful for someone to see how much of a current year's profitability can be explained by profitability from previous years. 

I'm not sure how useful this exercise is, but there do seem to be some outliers near the top of this list, which merit more investigation. For example, Shen Yun Performing Arts and Portland Theater Productions seem to have incredible margins.