Nonprofit to Profit: How to Make Money From a Nonprofit
Nonprofit to Profit: How to Make Money From a Nonprofit
Nonprofit organizations are founded with a specific purpose, generally referred to as a mission, that extends beyond generating a profit. The most important goal for a nonprofit is to address one, or more, of the major issues facing society. Due to their nature, nonprofits rely on different funding sources to traditional businesses. They raise income through various channels including, donations, fundraisers, and grants from foundations and certain agencies within the government. Nonprofit organizations rely on volunteers, who generously contribute their time and skills to further the mission of the nonprofit.
There is a common misconception that nonprofit organizations cannot make money - this is untrue. Although they are required to operate under a different set of circumstances to for-profit businesses, nonprofits are legally able to have a surplus of revenue. However, it is necessary that any excess money generated is reinvested into the nonprofit to further its goal. Profits, by law, cannot be distributed to individuals or shareholders. In order to successfully enact positive societal change, nonprofits must be financially sustainable. The organization must be certain that revenue exceeds expenses.
How Nonprofits Make Money: Revenue and Profit
In the context of nonprofit organizations, there is a distinct difference between revenue and profit. Here are the defining characteristics of the two:
- Definition: Through the lens of a nonprofit, revenue is the total amount of money received in a specific frame of time. Typically revenue will be calculated on an annual basis. These funds can come from any source, with likely channels being donations from supporters, fundraising events, foundation grants, and other sources.
- Purpose: Revenue is extremely important to consider when operating a nonprofit organization as it is responsible for securing the financial sustainability of the organization and, therefore, its ability to continue functioning. Any revenue generated by a nonprofit is used to cover program costs and expenses associated with operating.
- Definition: In the context of a nonprofit organization, profit is often referred to as surplus. Surplus is the balance remaining after the organization has subtracted any program and operating costs from its total revenue. If there is a positive balance remaining after these subtractions have been made then the nonprofit is operating on a surplus.
- Purpose: As mentioned earlier, it is unlawful for nonprofits to distribute surplus to owners or shareholders. Surplus is required to be reinvested into the organization. This allows nonprofits to secure financial stability, plan for the future, establish a monetary reserve, and expand their programs.
Revenue generation is absolutely paramount to the financial sustainability of nonprofit organizations. While nonprofits may have alternative structures and goals to businesses in the for-profit sector, they still require monetary resources to effectively fulfill their missions. Nonprofits often have expensive operational costs that must be covered by their revenue. These costs include, salaries for staff, office space rent, utilities, and a range of other overhead expenses. Revenue also helps to cover the expansion and development of charitable programs. Nonprofit organizations are able to reach a wider audience and create fresh initiatives when they have access to a larger pool of funds, allowing them to make a more significant positive impact. Revenue generation is directly tied to the quality and influence of a nonprofit organization. It enables them to hire staff of a greater skill level, make use of the latest technology and resources, and measure and improve their contributions to the communities that they serve.
Common Sources of Nonprofit Income
Donations and Foundation Grants
Donations and grants can come from multiple sources:
- Individual Donations: Individual donations come from private citizens that contribute a portion of their personal funds to the nonprofit organization. Individual donors are usually motivated by their personal connection to the mission of a nonprofit and these donations vary in size and frequency, making them a greatly versatile source of income. It is vital to create long-term relationships with individual donors to improve sustainability.
- Corporate Partnerships: Nonprofit organizations may decide to form alliances with other businesses in order to collaborate on a shared goal. Companies might offer support in the form of donations or employee volunteer efforts. These inter-business relationships are mutually beneficial to both parties. The nonprofit will receive financial support, expertise, and access to a wider audience, whilst the corporation is able to generate positive branding, partake in community engagement, and support a mission that aligns with its core values as a business.
- Government Grants: Government grants are funds that are issued to support a nonprofit by local, state or federal agencies. These agencies select nonprofits to award grants to based on their mission and the final choice will generally reflect the goals of the agency's public policy. Government grants are often sizable and greatly help organizations to scale their operation and expand their impact.
Fundraising events are a fantastic way for nonprofits to generate income. Here are some common examples:
- Galas and Dinners: Galas and dinners are deluxe fundraising events designed to bring together donors and supporters for an evening of fine dining, entertainment, and philanthropy. The dining experience is often supplemented by live music, silent auctions and keynote speakers. Attendees are able to support the event by purchasing tickets or tables and the revenue generated goes directly to the nonprofit.
- Charity Runs/Walks: Charity runs and walks are events that promote the participation of supporters in physical activity to generate donations. Participants are able to sign up to the run or walk, and will then seek donations from family and friends to support their efforts. The participant pledges any donations that they receive to the nonprofit associated with the run or walk. It is also common for the nonprofit to generate some extra revenue by implementing a sign-up fee for the event.
- Auctions: Auctions involve the sale of items and experiences through a bidding format, where the item is purchased by the individual that bids the largest amount. Nonprofits procure the items and experiences sold at the auction and any funds generated are returned to the organization as a form of revenue.
Sales of Goods and Services
Nonprofit organizations are able to sell products and services, similarly to a for-profit businesses, to create a revenue stream:
- Selling Merchandise: A great way to generate further income is the sale of merchandise. Commonly, nonprofits will sell branded clothing, accessories and promotional items related to their mission. Merchandise can be sold at physical events, online via the organization's website, or in partnership with local retailers. The sale of merchandise not only contributes to the revenue of a nonprofit but it also assists with spreading procured messages related to their cause. This strategy allows donors to show their support for an organization through the purchase of goods and acts as a continuous stream of income.
- Offering Paid Services or Courses: Nonprofits that have access to the expertise and staff-availability to provide paid services or educational courses are encouraged to do so. A good example of a service that could be provided is a guided nature tour by an organization that is supporting environmental conservation efforts. In this scenario, participants would be charged a fee to join the tour and all proceeds from the tour would be funneled back into the nonprofit. Alongside the ability of these services and courses to generate revenue, they are also a great way to raise awareness for an organization's cause.
Exploring Social Enterprises
Social enterprises are organizations that combine traditional business policy with a direct focus on addressing issues that face society, the environment, or local communities. These organizations are motivated by two factors: profitability in a financial sense and the positive impact they have on their targeted concern. The importance of social enterprises should not be understated. Comparatively to nonprofits, they generally have a lasting valuable effect that can greatly benefit marginalized groups, small communities, and society as a whole.
Businesses of the social enterprise variety contribute to nonprofit revenue via commercial activity. When making money, they have to consider reinvesting a portion of it back into the mission and operation of the organization. Often, social enterprises will sell products or services that align closely with their cause. For example, zoological foundations generally operate zoo sites. Visitors can pay for access and will be able to see a variety of animals from across the world that would otherwise only be accessible through media. Funds generated from operating the zoo will contribute towards the ecological conservation efforts of the foundation.
Here are some examples of successful social enterprises:
- The Big Issue: This magazine is sold nationwide in the UK by homeless or vulnerable individuals. It allows those individuals to generate some income whilst also raising awareness about homelessness.
- Goodwill: Goodwill operates a string of thrift stores across the United States of America where they sell a range of items that have been donated by the public. Revenue generated through these sales is used to fund job training and create opportunities for people with barriers to employment.
- TOMS Shoes: TOMS is a global corporation that specializes in the sale of their signature shoe. For every pair sold, they donate a pair to a child in need. TOMS has recently expanded into eyewear and coffee in an effort to further the impact of their social enterprise.
How Nonprofit Organizations Can Make Money via Membership and Subscription Models
A nonprofit may opt to create a membership or subscription model that allows supporters to make a regular donation in order to receive certain perks and benefits. A good example is the membership offered by the World Wildlife Fund (WWF). Supporters must donate a minimum of $5 each month to maintain their membership and, by doing so, are afforded access to news articles, presentations, community events, entry to WWF sites, and more. Members can be extremely important to a nonprofit due to the opportunity to build a community, increase stakeholder engagement, create a sustainable and recurring revenue stream, procure volunteers, and receive constructive feedback and suggestions.
Membership fees can be an extremely vital lifeline for nonprofit organizations to raise money. Through dues and renewals, memberships offer a nonprofit a guaranteed source of periodic income. Those who become members are also likely to make further donations to show their support for the cause. To further boost revenue from memberships, it is a good idea to promote a tiered format. This membership structure offers supporters different levels of financial commitment, so that they can choose one that is comfortable and aligns with their financial situation. In turn, this will make nonprofit memberships more accessible and, therefore, open to a larger audience. In some situations, a nonprofit may allow supporters to sign up for a lifetime membership. In the short-term this will create an injection of cash but in the long-term it will help to foster a sense of community and improve levels of engagement between supporters and their chosen organization.
Investment Income and Endowments
It is advisable for a nonprofit organization to invest some of its funds, if feasible, to create another stream of income and expand its financial resources. Nonprofits generally create a diversified portfolio that includes investments like, real estate, bonds, stocks, and more. Allocating funds across multiple types of investments is an ideal way to minimize risk and maximize returns. Deciding how much and where to assign monetary investments is a difficult task that should be carried out by a professional with expertise. For this reason, a nonprofit may decide to partner with an investment management company that can help it to enhance its success. It is important to monitor the performance of investments and adjust the approach based on the condition of the market or alterations to financial goals.
An endowment is a pool of donations that is invested in the stock market. The principal amount remains invested whilst any gains are returned to the nonprofit. Alongside investments, endowments are a brilliant method that nonprofit organizations can use to generate income. Endowments help organizations to become financially resilient. They form a reliable stream of income that can act as a cushion in the case of economic downturn, ensuring that nonprofits can continue working on their mission. Another way that endowments help with sustainability is to alleviate pressure on securing short-term donations. By providing a frequent boost to income, endowments reduce an organization's dependency on individual donors.
Corporate Sponsorship and Partnerships
There are plenty of benefits to corporate sponsorship and partnerships. Here are some examples:
- Financial Support: Corporations can offer hefty donations, typically via grants or sponsorship. These large sums of cash greatly assist a nonprofit with forming an expansive and sustainable operation.
- Resources: Corporations can help to reduce the expenses of a nonprofit by donating products, services, or expertise. As well as reducing overheads, these offerings can enhance the ability of an organization to perform effective work.
- Heightened Visibility: By partnering with a large corporation, a nonprofit can assume some of its reputation. This can help to further its reach and, by extension, garner more donations and support.
- Expertise: Corporations can offer nonprofits expertise through business acumen and in-depth knowledge of the industry, helping them to operate more efficiently and successfully.
- Impact Through Collaboration: Partnerships enable both parties to act on shared social responsibilities and objectives together. This collaborative method often makes for a more comprehensive approach to enacting positive change.
- Employee Engagement: Partnered corporations may encourage their employees to participate in opportunities to volunteer and to make donations to the associated nonprofit.
It is important for a nonprofit to be able to attract sponsors and partners to reap the above benefits. A great way to get started with discovering these opportunities is to attend industry events and begin networking with corporate decision-makers that are employed by businesses associated with your cause. Be sure to engage in conversations and discuss shared interests and values to start cultivating these important relationships. It's a great idea to showcase achievements in this environment and clearly communicate the mission and desired impact of the nonprofit. Recognize how the sponsorship or partnership will mutually benefit both parties and ensure that relevant conversations are followed up on through an appropriate avenue of communication.
How a Nonprofit Can Make Money Through Licensing and Royalties
A nonprofit organization can be a goldmine of intellectual property. From education materials and software to research publications and other content, there are plenty of licensing opportunities for an organization in the nonprofit sector. Licensing agreements can be entered with a third party company and allow an organization to specify conditions such as, royalties, duration, scope of use, and any associated restrictions with the use of the intellectual property. Licensing can be exclusive or non-exclusive. Exclusive licensing grants permission of use to a single entity whereas non-exclusive licensing grants use to multiple entities, this is entirely at the discretion of the nonprofit organization.
A major reason for a nonprofit to enter into a licensing agreement is to generate revenue via royalties. Royalties come in the form of a payment from a third party for the right to access, use or distribute intellectual property that belongs to the organization. Royalties can be a valuable income stream for a nonprofit whilst expanding the scope and impact of its intellectual property. A rigid licensing agreement is one that clearly benefits both the organization and the licensing body. Ensuring an arrangement of this fashion will provide the most lucrative opportunity for the nonprofit.
Challenges in Revenue Generation
A nonprofit organization has to maintain a balancing act between progressing with its mission and continuing to make money. One of the keys to success is identifying revenue streams that align with its goals. This will ensure that the organization's pursuit of financial sustainability is consistent with the values at the heart of its mission. Problems can arise when the emphasis on generating revenue is greater than the emphasis on enacting change. This is known as "mission drift" and it is crucial to guard against the purpose of an organization becoming compromised by financial concerns.
Whilst walking the tightrope between an organization's mission and its finances, it's also essential to prioritize ethical considerations. Nonprofits have to remain transparent in their efforts to generate income. The most important way to do this is to ensure that donors, members and the public have a crystal clear understanding of the ways in which their funds are being made use of. Donors expect that their generous contributions will be used to make progress towards the mission of the organization. Nonprofits must guarantee that they are ethical stewards of the funds in their control, escorting money in its journey from the donor to the charitable programs it funds.
Q: Can nonprofits have a surplus?
A: Absolutely! It is not unlawful for a nonprofit organization to have a surplus of cash. However, there is scrutiny over the management and utilization of surplus funds. An organization that has excess revenue is expected to reinvest it and make use of it by furthering progress towards its goal. Another option is to create a reserve using the surplus. A reserve, or rainy day fund, is money that is saved for use in the case of an emergency or financial hardship.
Q: How do nonprofits ensure financial transparency?
A: In simple terms, a nonprofit can achieve financial transparency by sharing as much financial information as possible. Providing frequent, easily digestible financial reports to directors, stakeholders and the public is a great way to become financially transparent. Embracing an "open book" policy and adhering to financial regulations, such as the filing of IRS tax form 990 in the United States of America, should help to foster a proactive strategy for disclosure and accountability.
Q: What are the tax implications for nonprofit income?
A: A nonprofit organization in the United States of America will typically apply for tax-exempt status, which exempts it from federal taxes on income. This tax exempt status may also apply to state and local income taxes but this can vary based on the jurisdiction that the nonprofit operates in. If an organization is to partake in revenue-generating schemes that are unrelated to its tax exempt purposes, it may be subject to unrelated business income tax (UBIT). There is a limited amount of unrelated business income that is acceptable before UBIT applies.
Diverse revenue streams are vital to a nonprofit organization for the following reasons:
- Risk Mitigation: Having multiple streams of income allows a nonprofit to spread its financial risk. If one source is failing, other sources can fill the gap.
- Reduced Dependency: Reducing the dependency on a single source of income leads to greater financial stability.
- Capacity for Growth: A diverse group of income streams can provide the nonprofit with the capital required to expand its operation.
- Financial Resilience: Diversity of revenue streams can bolster an organization in times of economic downturn. This allows for continuation of the mission during difficult periods.
Always be aware of ways in which to innovate when generating new streams of income, this is the greatest way to ensure diversity in this area. Be creative with problem solving and attempt to find novel ways to plug financial gaps. An inventive approach to money making can capture the attention of a wider audience and increase the impact of a nonprofit's work. For assistance with revenue stream procurement, be sure to contact Paybee and sign up for the free demo today.