Business Income for Nonprofits Thomas P. Holland, Ph.D., Professor UGA Institute for Nonprofit Organizations

Nonprofits receive income from 1. Individuals with particular interest in the mission of this organization 2. Foundations and corporations Independent foundations Corporations and corporate foundations Community foundations Operating foundations 3. Public Sources (federal, state, local)

Total Income for All Nonprofits Fees for products & services 50% (growing) Public (government) 30% (declining) grants & contracts for restricted purposes Private Contributions 20% individuals give about 70% of that foundations give about 10% corporations give about 10% bequests, wills, trusts, endowments 10%

Importance of Diversification Over-dependence on any single approach carries risks Reduced autonomy Goal displacement Volatility Multiple sources and approaches help counteract those risks Rate of growth in earned income is greater than in all other approaches (donations, grants)

Risks in Government, Foundation, and Corporate Grants Vulnerable to changing interests Reductions in public support for most community programs. Medicare and medicaid have seen rises, but many politicians call for sharp reductions in these. Intense competition for all types of grants Grants support a specialized project rather than support for whole organization Require extensive staff time and skills Pull organization toward compliance with grantmaker’s interests, bureaucracy, lower autonomy, rather than innovation and responsiveness to consumer needs.

Kinds of Earned Income Membership dues Program activity fees Admission fees Sales of products or services Gift shops Concessions Contracted services, such as training, maintenance Uniforms, supplies, materials

Advantages of Earned Income Less vulnerable to changing public attitudes and interests Greater control over activities Greater predictability of income Fewer restrictions on use of income Better support for whole organization, autonomy Promotes responsiveness, innovation, accountability Clearer advancement of mission, reduced risk of mission-drift

Risks from Earned Income Is enterprise closely and clearly related to and supportive of organization’s mission? If not tied clearly to mission, activities can come to displace mission, esp. in organizations serving the poor. Public image and trust: are profits more important than mission? Enterprise runs risk of losing money How extensively should nonprofit operate like a business? Mission vs. market challenge

Public Perceptions Popular assumptions that most businesses are efficient and responsive to consumer demands. But, businesses seen by some as shirking community citizenship, dampening altruism. Nonprofits often seen as inefficient, often unresponsive, self-serving more than consumers. Government programs also distrusted.

Expansion of Businesses into Nonprofit fields For-profits growing in health care, education, prisons, adoptions, case management Raising capital for start-up costs is especially difficult for nonprofits, due to non-distribution constraint. Joint ventures: business and nonprofit collaborate, share strengths Example: Lockheed and Urban Institute developing programs for disorganized families Nonprofit must offer distinctive skills, such as knowledge and experience in an area of consumer need. Careful negotiations to protect each partner while building on each other’s strengths

Partnerships between Nonprofits and Businesses Sometimes called “cause-related marketing” Offers a service that benefits both partners as well as consumers Examples Bookseller sponsors a literacy nonprofit’s reading project in return for publicity Restaurant offers % of profit from an evening’s dinners to hunger project Nonprofit trains entry level staff for local businesses

Benefits of Partnerships Nonprofit gains Financial support Public credibility Business expertise Business gains Favorable public image Increased sales Staff engagement and loyalty Extended staff skills

Risks To nonprofit To business Potential exploitation (nonprofit usually weaker) Compromised integrity of mission Diminished public trust Unexpected discontinuation To business Negative publicity about nonprofit Stockholder disapproval

Guidelines for forming partnerships: both partners should Already have excellent community reputations Identify mutually acceptable options to meet agreed upon goals Offer and be known for high quality programs, services and staff Define the specific areas for collaboration Make expectations both ways clear. Secure the resources needed to implement project Set out conditions for assessing, continuing and terminating partnership

Related vs. Unrelated Business Income Nonprofits can have businesses as part of programs and as separate for-profit companies. IRS distinguishes income as either Related to mission, hence non-taxed Unrelated to mission, hence taxed See IRS publication # 598 Examples Job training center contracts with local businesses for building maintenance College sponsors international tours Tests Is the business clearly related to the organization’s mission? Would the nonprofit continue the business if it did not make profit?

Either Type requires Business Plan Description of the venture, including primary features, advantages, benefits What the organization plans to do with it Justification that the plan is credible, including supportive research Strategic goals and justifications Market analysis Who the users are Benefits they see from the venture How they will use it What they are willing to do and pay to get it How the venture will be promoted

More on basics of a business plan Staffing plan, including the expertise needed to create and then operate the venture Management plans: how the expert staff will be organized, coordinated, led Financial plan: costs to establish the venture, operate it, budgets for first several years, expected amounts and sources of revenues, when it will break even and then return profits Description of current organization, its resources and programs, staff expertise, & how present situation will contribute to success of new venture

Summary Earned income is a major and growing source of income for nonprofits It offers advantages of stability, control, predictability, accountability Partnerships with businesses can support nonprofits’ new ventures needing expertise from both Win-win for both Distinction between related and unrelated business income important for taxes Either form requires careful business plan