I just spent 2 hours making this pretty picture for you:
It shows the relative relations of 4 “business models”
For-profits make more than they spend for the private benefit of owners and customers.
B-Corps (or social enterprises) often make less and spend more because they are targeting a sub group of customers and/or spend more on their “inputs” of materials and labor because they are trying to combine social value with a sustainable business model.
Non-profits spend what they make to minimize costs to customers for providing the best service possible at that cost. (That’s the nice way to see them. Those that are abusive or corrupt can overcharge for shoddy service while overpaying their incompetent staff.)
Charities don’t earn revenue but “depend on the kindness of strangers” for support of their charitable works. Charities are more vulnerable to collapse due to a shift in donor attention, but that means that the arrival of an enthusiastic patron can produce a lot of action in a short time.
Is this figure helpful? Any other thoughts?
Addendum (18 Oct via DC):
I believe there is another category between a non-profit and a charity, e.g. an NGO that relies on a mix of private individual donors, private/public grants, and private/public contracts.
Also, not to split hairs, but just because something is for-profit doesn’t mean they actually make a profit. And just because something is a non-profit/charity doesn’t mean they are less well off than a for-profit. I say this as someone who works for a nearly billion dollar/year NGO.
I agree that an NGO goes between charity and nonprofit but it may be a mix of the two rather than a separate type, ie, depending on its mix of revenues and grant money.
In size, NGOs can be big but the big ones are usually smaller than big for profits. More important, I agree about “profits” but NGOs find ways (sometimes less than useful) to spend their money 😉
I like the simplicity of your pretty picture. It is a good introduction, but if I were using it as a teaching tool, I would use it as a straw-man that would be displaced. I’d use it to illustrate that it’s not the entries on the income statement that matter, but what happens on the balance sheet.
The real differentiator is not profit- virtually all of those enterprises have net income (profit) and retain earnings. Certainly they all can (and probably should). The key differentiator is how they use those retained earnings. B-corps and for-profits compensate owners/equity-holders via dividends. Not-for-profits and charities (a distinction that doesn’t make a big difference to me) don’t compensate owners/equity holders (and can’t).
To me, capital structure and how that capital is paid for, is what really makes the difference. All of these entities can take on debt. All of them have owners. But only the for-profits (or hybrids) can create financial returns for the capital those owners invest in the business.
If I had time, I’d draw a pretty picture to illustrate!
Good point, David, but profits are still “zero” *in the long run* for non-profits because they can only spend their retained earnings, so I think that the cash flow diagram is still accurate, as a representation of the differences.
/takes bait…
Aren’t profits–in the long run–zero for all firms?
Not really. Nonprofits are not allowed to distribute so they’re 0 long run. For profits are >0 short run (profits) and long run (still in business)