03/01/2012 01:34 pm ET | Updated May 01, 2012

Lesson #4: The Non-Profit Needs to Be Run More Like a Business

This is the fourth post in a series -- Ten Things We'd Like to Tell Every New Philanthropist. Each title paraphrases a common misconception or mistake.

Like a lot of things in life, it depends on what you mean by the words "run like a business." Sometimes the expression is used inappropriately and ignorant of the unique issues a non-profit faces. Three simple examples: 1) In most situations in the non-profit world, the "end customer" does not buy the product or service. 2) The usual economies of scale are often not present for non-profit direct service organizations. 3) There is no clear "market signal" like earnings per share to guide and optimize where capital flows; in fact sometimes money can run away from successful non-profits because they don't "need" it as much. Non-profits don't need to be "run like a business" when it comes to mission, effectiveness and resource allocation, etc.

When it comes to efficiency, operational processes, and measurement, however, non-profit organizations can learn important lessons from private sector business (and some certainly have). No matter how fuzzy or grey the social outcomes are, measurement is important. How else do you know if you are realizing your mission? Areas like strategic planning, building financial models, cash planning, and hiring and retaining quality staff are all examples of domains where running a non-profit more like a business does make sense. In the end, the only reason to do so is to help the non-profit increase its capacity to be effective at achieving its mission.

P.S. By the way, private sector businesses could learn a lot from non-profits as well, but that's another future topic altogether.