Debunking the 10 Biggest Nonprofit Myths

There are numerous myths about how nonprofits should operate. Most pervasive and central to all others is what I call the “myth of uniqueness.”

The myth of uniqueness is the illusion that because nonprofits operate under different rules related to taxation and ownership, they are fundamentally different from for-profit organizations. This is manifested in the idea that nonprofits should not be run like businesses.

Under this myth, business planning is impossible because the nonprofit is subject to forces beyond its control. Measuring outcomes is impossible because social impact is too hard to measure. Growth is haphazard because nonprofits have no control over external funding from foundations, government agencies or capricious donors.

Unfortunately, this myth — and many others it engenders — are so pervasive they stunt many small to medium-sized nonprofits, limiting their ability to scale and grow to meet the social challenges they face.

In reality, nonprofits can grow and scale for success just like their counterparts in the for-profit world. The first step is to recognize the myth of uniqueness for what it is — a myth. Then nonprofits can adapt the strategic, data-driven approaches that the private sector uses to grow and scale for impact. Here are some of the most pervasive misconceptions around nonprofits, and the truths behind them:

1. Nonprofits Shouldn’t Make a Profit

It’s true, tax laws prohibit nonprofits from “private benefit,” but they can and should generate surplus revenue to grow, innovate and weather economic downturns. While nonprofits can’t distribute profits to private individuals, they have to pay reasonable compensation for services just like any other organization. This includes paying the salaries necessary to attract and retain qualified staff (see Myth No. 4). Smart nonprofits operate like businesses, reinvesting funds into their mission for long-term impact.

2. The Best Nonprofits Have the Lowest Overhead

Many nonprofits operate under a cultural assumption that all costs other than direct program services are wasteful and should be minimized. This overhead myth and the myth of uniqueness hobble nonprofit growth and impact in numerous ways — chief among them when they are used as an excuse not to pay competitive salaries. 

Related story: Don’t Hide Overhead From Your Donors — They’ll Understand

In reality, nonprofits must invest in leadership, technology, and operations. A well-funded infrastructure leads to greater efficiency, innovation and impact, while underinvesting in these overhead expenses is a surefire way to hamstring growth.

3. Nonprofits Should Rely on Donations Alone

Dependence on philanthropy alone is risky and unsustainable. The best fundraisers do a lot more than write grants. They understand the full range of gift, grant, contract, earned and invested revenues from individuals, foundations, corporations and government agencies. They may even have experience with impact capital, for-profit subsidiaries, licensing campaigns and other out-of-the box ways to raise money. A financially healthy nonprofit diversifies its revenue with earned income, grants, corporate partnerships and recurring contributions.  

4. Nonprofit Leaders Shouldn’t Earn Competitive Salaries

Just like in the private sector, nonprofits must offer fair, competitive compensation to attract and retain top professionals. Underpaying leadership can lead to high turnover and inefficiency. In addition, the No. 1 barrier to fundraising performance is poor compensation and a lack of incentives for fundraising staff. 

In business, salespeople are among the most well-compensated professionals because their efforts directly impact the bottom line, growth and sustainability. The same is true in the social sector. High-performing organizations must invest heavily to create teams of dedicated professionals. While the nonprofit fundraising profession’s rules of ethics rightly prohibit pay based on a percentage of dollars raised, it is not hard to devise incentives and reward packages with a holistic view of staff performance. Remember, talent drives impact.

5. Good Intentions Are Enough to Succeed

Passion for making the world a better place is a central motivator for almost everyone who works in the social sector, but passion without clear strategy leads to stagnation and frustration. Successful nonprofits apply business principles — such as using strategic planning, performance metrics and data-driven decision-making — to create measurable change.

6. Bigger Nonprofits Are Always More Effective

Nearly 90% of nonprofits function with a budget of less than $500,000, and some are much smaller. Yet smaller, well-run nonprofits can outperform larger, mismanaged ones. 

In a study of 12 of the most impactful nonprofits to conclude that, when it comes to budgets, size doesn’t correlate with impact. “Some of these nonprofits have made a big impact with large budgets; others have achieved similar impact with much smaller budgets.” Not surprisingly, they found one of the top hallmarks of high-impact nonprofits was their ability to “make markets work.” This requires plans that are bold, measurable, and business-oriented. It’s not about size; it’s about focus, efficiency, and delivering meaningful results. 

7. Nonprofits Can’t or Shouldn’t Be Innovative

Innovation isn’t just for startups — it’s critical for nonprofits to stay relevant and effective. The best nonprofits embrace technology, lean principles and forward-thinking strategies to maximize efficiency and outreach. Just as in the business world, nonprofit leaders should be biased toward action and experimentation over analysis and reflection. They should always be open to new ways of operating that improve efficiency and the organization’s ability to serve its community and grow to meet new challenges.

8. Volunteers Can Replace Paid Staff

Nonprofits enjoy access to what appears to be a free labor pool in the form of volunteers, but working with volunteers carries hidden costs that are often not recognized or funded. Volunteers are valuable and many nonprofits rely on them heavily, but they can’t replace the expertise and consistency of full-time professionals. Effective nonprofits balance volunteer contributions with skilled staff to maintain long-term stability.

9. Grants Are Free Money

Grants come with significant restrictions and reporting requirements, often covering specific programs but not essential operational costs. Smart nonprofits build a diversified funding model beyond grants. These include earned income generated through the sale of goods or services, often through contracts with other organizations or government agencies; and income generated from the nonprofit’s investments in the form of interest, dividends and capital gains. Always consider grant funding as a one-time event. Grants should be used to support new ideas or data-driven initiatives, not core programs.

10. Nonprofit Impact Can’t Be Measured

Just like businesses track sales and profits, nonprofits must track key performance indicators (KPIs) such as program outcomes, community impact and return on investment. If you think social impact is difficult to measure, it probably means you have not thought hard enough about the outcomes you want to achieve and how to get there. Identify your organization’s desired outcomes that are measurable by numbers. In addition to being able to measure your organization’s achievements, backing up your success stories with hard data helps attract funding and credibility.

Just like in the for-profit world, high-performing nonprofits are the ones that take the time to get everyone laser focused on goals, strategies and data to measure success. By focusing on results that are clear, measurable, evidence-based and independently verifiable, nonprofits can meet the challenges they face today and in the years to come.

The preceding content was provided by a contributor unaffiliated with NonProfit PRO. The views expressed within may not directly reflect the thoughts or opinions of the staff of NonProfit PRO.