Well-run nonprofits know that a diversified funding stream is one of the primary factors in sustainability. This diversification can include a variety of large and small donors, grants, and government contracts, but earned income can be one of the best sources of revenue that a nonprofit can seek. A stream of revenue that lessens the organization’s dependence on philanthropic dollars can be extremely beneficial, and on September 10, the Foundation Center welcomed Geri Stengelis, president of Ventureneer.com, along with three nonprofit representatives, for a presentation titled Creating Critical Long-Term Revenue Streams Through Social Enterprise. The panelists discussed some of the things a nonprofit should consider when building a source of entrepreneurial income. Here are a few tips from their discussion:
Explore all revenue options. Take some time to think about what your nonprofit has or is capable of providing that could be profitable. Our presenters suggest that you go down your balance sheet as you do this, considering what you already have available and roughly how much revenue you’d realistically like to generate. What are your assets? Do you have real estate you could rent out? Is there a product you could sell? A service you could provide? Give these questions some extensive thought before you make any decisions.
Be sure that there is a demand for what you’re selling. It is not sufficient to begin offering a good or service and assume that there will be buyers simply because the enterprise is for a good cause. You need to offer the right product at the right price point in order to generate revenue. If you are selling cookies, for instance, and there are other vendors selling cookies at a lower price that are just as good or better than yours, then it’s time to figure something else out. As you learn what products have a higher or lower demand, your business venture should be agile enough to change your product if need be.
Create a solid business plan. To help ensure a successful future for your business venture, you will need to craft a clear business plan that will illustrate how your enterprise will impact your organization’s bottom line. This will be especially important if you’re entering into a partnership with other organizations or companies. As an example, one of our panelists previously ran an organization that provided disadvantaged New Yorkers with job placement in for-profit companies. In order for employers to maintain a partnership with the nonprofit, a good business plan was essential to demonstrate the benefits of greater productivity and lower employment costs for the companies. To read more details on putting together a nonprofit business plan, you may refer to our earlier posts here and here.
Don’t neglect research and evaluation. In order to know whether your enterprise works or not, research will be important as you prepare to get the venture off the ground, and evaluation will be crucial as you continue forward. Be sure that you continuously study the business activities’ impact on your finances, and whether the work that goes into the enterprise is offset by a sufficient stream of revenue to sustain the organization. Consult the book Generating and Sustaining Nonprofit Earned Income: A Guide to Successful Enterprise Strategies (available in the Foundation Center library) for information on conducting this type of evaluation.
Is it taxable? Although the nonprofit you represent is tax-exempt, your income may or may not be! If the revenue your enterprise generates is directly related to your charitable mission (the organization mentioned earlier, which provides job training and placement, would be an example of this), then it will not be taxed. If, however, the revenue comes from activities unrelated to your mission (examples could include renting out space in your building, or operating a café adjacent to your facility), then it is classified as unrelated business income (UBI) and will be taxed. You can read a good explanation and examples of UBI here. Consider how any potential taxation will affect your bottom line before choosing to proceed.
These are just a few steps involved in successfully generating income for a nonprofit. To gain more detailed knowledge, the following books available in the Foundation Center library may offer valuable assistance:
- Generating and Sustaining Nonprofit Earned Income: A Guide to Successful Enterprise Strategies, by Sharon M. Oster, Cynthia W. Massarsky, and Samantha L. Beinhacker
- Nonprofit Sustainability: Making Strategic Decisions for Financial Viability, by Jeanne Bell, Jan Masaoka, and Steve Zimmerman
- Unlocking Profit Potential: Your Organization’s Guide to Social Entrepreneurship, by Boardsource
You might also consider partaking in the two remaining sessions of our current webinar series, Building Your Nonprofit’s Sustainability. Finally, for links to additional resources, check out our Knowledge Base Article about earned income on Grantspace.
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