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

2. 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)

3. 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 % of that
foundations give about %
corporations give about %
bequests, wills, trusts, endowments 10%

4. 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)

5. 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.

6. 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

7. 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

8. 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

9. 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.

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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?

16. 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

17. 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

18. 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