Building Sustainability: Earned Income for Your Nonprofit?

by Rosemary Bayer and Lee Gorman October, 2010

There is much talk these days about social enterprise and about building nonprofit sustainability with earned income. This article will discuss what these terms mean, why earned income might be important to your organization, and what your next steps might be. There are many definitions of Social Enterprise. For our purposes, a social enterprise is an organization that uses its profits to further social or environmental missions also known as a mission-driven, as opposed to a profit-driven, organization. A social enterprise can have either a for-profit or nonprofit structure. Earned income for nonprofits simply means compensation in exchange for products or services. If you earn money by selling goods or services, that is earned income. If you take the profits from that income (what's left after you pay the cost of getting it) and use them to further your nonprofit mission, you have a social enterprise. So, how can people who run a nonprofit keep focus on their mission when they are distracted by managing a business and making profits? Every organization, for-profit or nonprofit, needs to bring in at least as much money as it spends or it will go out of business. The question is simply whether your revenue is earned or donated. The more revenue you earn, the more control you have, and the easier it is to smooth out your income stream and run a more predictable and sustainable organization. The main idea is to align your core competencies with marketplace opportunities in order to simultaneously generate earned income and expand your social or environmental impact. Some familiar examples of organizations that earn income include the Goodwill, Michigan State University, NEW (Nonprofit Enterprise at Work), Architectural Salvage Warehouse, Urban Farming, the Scarab Club and the Girl Scouts. In fact, any nonprofit that charges entrance fees, membership dues, tuition, etc. is earning income.

There are tax rules for earned income for nonprofits to ensure that you use your profits to serve a mission. If you stick to earned income programs that align with and serve your mission, you will steer clear of conflicts. It is always wise to check with your legal/accounting advisors to make sure your plans will protect your 501(c)x status.

The movement toward more earned income for nonprofits is being driven by a number of factors: Macro economic conditions are driving up the need for services typically provided by nonprofits Continued growth in the number of nonprofit organizations is causing more intense competition for funds Funders and donors are requesting or requiring accountability Predictable revenue for bigger, longer term outcome goals is needed Organizational stability and growth is increasingly important to funders

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Copyright 2010 NEW (Nonprofit Enterprise at Work Inc.), a 501(c)(3) nonprofit organization

Building Sustainability: Earned Income for Your Nonprofit?

by Rosemary Bayer and Lee Gorman October, 2010

The list of benefits is even longer: More funds means you GET MORE DONE! Stabilize operations and increase overall effectiveness with diversified funding sources giving predictable, reliable and sustainable revenue Funds are not tied to a specific program Invigorate your Board many have business backgrounds and would love to be engaged The planning process to develop an earned income stream is beneficial all by itself Funders want you to build capacity, sustainability and self -reliance New enterprise can spark innovation within your mission Coordination can be improved between financial and program areas Increase visibility to the public and your funders, enhancing your reputation Create jobs!

There are two main strategies for earned income. Consider an organization-wide earned income strategy, where your entire mission or operation is involved, or a program-oriented strategy, where a single program can drive revenue for itself or for the organization. Income earned can cover all or just part of a program's costs. As you think about your strategy and what services or products you could provide, it is critical that you choose a strategy and tactics that align with your mission. Then not only will you avoid drifting away from your mission, but you will be more successful because you are still doing what really matters!

Some examples of earned income include: Fee for services: NEW Retail: Goodwill Software products: ardentCause Housing / Rent: United Methodist Retirement Communities Restaurants / Catering: Detroit Rescue Mission Ministries Search Engine: GreenMaven Consulting: The SCARAB Club Agri-business: Urban Farming, Inc. and the Capuchins Earthworks Urban Farm Memberships: Printing Industries of Michigan Home repair: Home Repair Services

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Copyright 2010 NEW (Nonprofit Enterprise at Work Inc.), a 501(c)(3) nonprofit organization

Building Sustainability: Earned Income for Your Nonprofit?

by Rosemary Bayer and Lee Gorman October, 2010

In this short space, we cannot delve into the details of building an earned income stream within your organization*, so we provide just this high level outline: Bring together your organizational capabilities, mission and vision. (You have done these over the course of our series!) Have a strategy in place and the means to support building this new initiative. Start with a few workable ideas. Brainstorm around your mission, what you are good at and what resources do you bring to bear. Who wants or needs that (e.g. if you have people who can knock things down, maybe a demo or salvage service)? Would they pay, and what would competition look like? Is there potential for collaboration? What revenue could this bring, and what would your costs be AND does the first minus the second come up with a positive number? If not, go back to the workable ideas and try again. (If this seems like a mini business plan bingo!) Now, communication Take your short list of ideas and start socializing this around your organization. Get the Board into the conversation. There could be significant resistance this can be a big change. Use the list of drivers and benefits to identify the things that matter most to your organization and Board, and help them understand how this can build long-term sustainability. Think about a change management initiative. Once you have buy-in, treat this like the other strategic or operational programs we've discussed in past articles manage the process and COMMUNICATE! Here are a few gotcha's to watch for: Managing the business can take time and can cause distraction Have the right business skills: managing costs and cash flow, risk of revenue loss, getting value from technology and infrastructure investments, marketing and business development Protect your IRS status by watching legalities and taxes Stay true to yourself - watch for mission drift

For many nonprofits, earned income is a great way to become self-reliant, build long-term sustainability, increase effectiveness and even create more jobs! See you next month for the very last article in the series! Lee and Rosemary

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Copyright 2010 NEW (Nonprofit Enterprise at Work Inc.), a 501(c)(3) nonprofit organization

Building Sustainability: Earned Income for Your Nonprofit?

by Rosemary Bayer and Lee Gorman October, 2010

Rosemary Bayer is Chief Inspiration Officer for ardentCause, L3C, a company dedicated to helping nonprofits increase capacity through operational performance improvement and the adroit use of technology. She has 25 years in the Information Technology industry, and excels at inspiring varied groups of people to pursue a common vision, as well as problem-solving and inventing. Experienced in both for-profit and not-for-profit ventures, she was a founder of the nonprofit Michigan Council of Women in Technology (now 650-plus members) and founder and president of the MCWT Foundation.

Lee Gorman,the founder of Barton Consulting Services, LLC, is an insightful, results-oriented executive with over 25 years of diverse experience in strategic planning, product planning, implementation and leadership. She has particular expertise in assisting organizations to understand and articulate their missions, visions, and values statements, and then to develop specific goals and strategic priorities. She has demonstrated this proficiency in health care, educational, automotive, and other for-profit and non-profit businesses.

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Copyright 2010 NEW (Nonprofit Enterprise at Work Inc.), a 501(c)(3) nonprofit organization