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Not-for-profit businesses in the US are not legally allowed to turn a profit. There are no financial owners to be paid a profit. So, everything you wrote about

Not-for-profit businesses in the US are not legally allowed to turn a profit. There are no financial owners to be paid a profit. So, everything you wrote about that is BS. Not-for-profit businesses are still businesses; they need to take in as much as they spend, whether it's through fees for service (e.g. tuition) or donations. Colleges and universities in the US spend a lot of time begging alumni to donate money. And yes, there is education and training specific to running a not-for-profit _business_, and many GOOD leaders have MBAs. I have watched a lot of them fail because the folks at the top did not manage money well.

pwpw 3y ago
I think you and the GP may be getting tripped on word choices. Most private universities in the US are organized as 501c3 organizations. There are numerous requirements[0] to be a 501c3. This however does not prevent a non-profit from being run like a for-profit business. One of the most crucial components of operating a 501c3 is the financial statements reporting requirements[1]. From an accounting perspective, the organization cannot keep retained earnings (owner’s equity) balance at year end since there are no owners. Rather than having retained earnings, 501c3s deal with net assets, which no person can have ownership of. The crucial thing here is that the business does not retain profits at the end of the accounting period. However, it can earn what we would call profit in a non-501c3 scenario and then use that money for business activities, paying employee wages, investing, etc. Accordingly, a 501c3 can take in more than it needs to spend. It just has to properly handle that excess money to meet the accounting standards. See the Wikimedia Foundation’s financial statements[2] for a great example. They spend a minuscule amount of their net assets on actual business expenses. They spend quite a bit on wages, travel and conferences, and various other things that are arguably unnecessary to serve their core mission. However, they follow all of the accounting guidelines and are therefore granted reasonable assurance that they are fairly representing their financials according to KPMG. Back to the initial topic, it’s now clearer to see why and how a university such as Harvard can be a 501c3 and bring in exorbitant amounts of “profit” that probably do not better serve their core mission as an education center. However, it’s all about following rules and how you spin it. Harvard isn’t begging alumni for donations because they need it. They had $61B in net assets at year end[3]. I think it’s completely fair to argue that Harvard doesn’t need that much money while they deliberately stay at their current size. In fact, I would argue one step further that they have so much money on hand, they shouldn’t even be charging tuition. Their $59B investment portfolio makes up the bulk of their net assets. From a book perspective, they are essentially an investment fund with a university attached. Looking at a public university, the University of Texas ended the year with a $66B net position[4]. They paid their football coach over $5[5] from their massive pool of assets and are still paying their former head football coach tens of millions of dollars. I would be interested in hearing if there are universities in Europe that operate like this. Quickly looking up the aggregated statement of financial activities for all Oxford colleges[6], I see that they had a 63M£ expenditure (loss) but carried forward 1.35B£ to end the year with positive funds carried forward of 1.36B£ (after a prior year funds adjustment). That’s incomparable to Harvard. As a CPA (who is not an expert on UK tax law), Oxford’s financial statement appears much more inline with the spirit of what I imagine a non-profit university should be. Harvard and the University of Texas look like two of the most successful companies in America to me. [0] https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-501c3-organizations https://www.irs.gov/charities-non-profits/charitable-organiz... [1] https://www.fasb.org/document/blob?fileName=ASU_2016-14.pdf https://www.fasb.org/document/blob?fileName=ASU_2016-14.pdf [2] https://upload.wikimedia.org/wikipedia/foundation/2/26/Wikimedia_Foundation_FY2021-2022_Audit_Report.pdf https://upload.wikimedia.org/wikipedia/foundation/2/26/Wikim... [3] https://finance.harvard.edu/files/fad/files/fy22_harvard_financial_report.pdf https://finance.harvard.edu/files/fad/files/fy22_harvard_fin... [4] https://www.utsystem.edu/sites/default/files/documents/report-state/2023/consolidated-annual-financial-report-fy-2022/ut-system-audit-afr-2022.pdf https://www.utsystem.edu/sites/default/files/documents/repor... [5] https://www.texastribune.org/2021/02/22/steve-sarkisian-salary-ut-austin/ https://www.texastribune.org/2021/02/22/steve-sarkisian-sala... [6] http://d307gmaoxpdmsg.cloudfront.net/collegeaccounts2122/aggregated.pdf http://d307gmaoxpdmsg.cloudfront.net/collegeaccounts2122/agg...

pwpw 3y ago

I think you and the GP may be getting tripped on word choices. Most private universities in the US are organized as 501c3 organizations. There are numerous requirements[0] to be a 501c3. This however does not prevent a non-profit from being run like a for-profit business. One of the most crucial components of operating a 501c3 is the financial statements reporting requirements[1]. From an accounting perspective, the organization cannot keep retained earnings (owner’s equity) balance at year end since there are no owners. Rather than having retained earnings, 501c3s deal with net assets, which no person can have ownership of. The crucial thing here is that the business does not retain profits at the end of the accounting period. However, it can earn what we would call profit in a non-501c3 scenario and then use that money for business activities, paying employee wages, investing, etc. Accordingly, a 501c3 can take in more than it needs to spend. It just has to properly handle that excess money to meet the accounting standards. See the Wikimedia Foundation’s financial statements[2] for a great example. They spend a minuscule amount of their net assets on actual business expenses. They spend quite a bit on wages, travel and conferences, and various other things that are arguably unnecessary to serve their core mission. However, they follow all of the accounting guidelines and are therefore granted reasonable assurance that they are fairly representing their financials according to KPMG. Back to the initial topic, it’s now clearer to see why and how a university such as Harvard can be a 501c3 and bring in exorbitant amounts of “profit” that probably do not better serve their core mission as an education center. However, it’s all about following rules and how you spin it. Harvard isn’t begging alumni for donations because they need it. They had $61B in net assets at year end[3]. I think it’s completely fair to argue that Harvard doesn’t need that much money while they deliberately stay at their current size. In fact, I would argue one step further that they have so much money on hand, they shouldn’t even be charging tuition. Their $59B investment portfolio makes up the bulk of their net assets. From a book perspective, they are essentially an investment fund with a university attached. Looking at a public university, the University of Texas ended the year with a $66B net position[4]. They paid their football coach over $5[5] from their massive pool of assets and are still paying their former head football coach tens of millions of dollars. I would be interested in hearing if there are universities in Europe that operate like this. Quickly looking up the aggregated statement of financial activities for all Oxford colleges[6], I see that they had a 63M£ expenditure (loss) but carried forward 1.35B£ to end the year with positive funds carried forward of 1.36B£ (after a prior year funds adjustment). That’s incomparable to Harvard. As a CPA (who is not an expert on UK tax law), Oxford’s financial statement appears much more inline with the spirit of what I imagine a non-profit university should be. Harvard and the University of Texas look like two of the most successful companies in America to me. [0] https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-501c3-organizations https://www.irs.gov/charities-non-profits/charitable-organiz... [1] https://www.fasb.org/document/blob?fileName=ASU_2016-14.pdf https://www.fasb.org/document/blob?fileName=ASU_2016-14.pdf [2] https://upload.wikimedia.org/wikipedia/foundation/2/26/Wikimedia_Foundation_FY2021-2022_Audit_Report.pdf https://upload.wikimedia.org/wikipedia/foundation/2/26/Wikim... [3] https://finance.harvard.edu/files/fad/files/fy22_harvard_financial_report.pdf https://finance.harvard.edu/files/fad/files/fy22_harvard_fin... [4] https://www.utsystem.edu/sites/default/files/documents/report-state/2023/consolidated-annual-financial-report-fy-2022/ut-system-audit-afr-2022.pdf https://www.utsystem.edu/sites/default/files/documents/repor... [5] https://www.texastribune.org/2021/02/22/steve-sarkisian-salary-ut-austin/ https://www.texastribune.org/2021/02/22/steve-sarkisian-sala... [6] http://d307gmaoxpdmsg.cloudfront.net/collegeaccounts2122/aggregated.pdf http://d307gmaoxpdmsg.cloudfront.net/collegeaccounts2122/agg...