Nonprofits Have to Make Money (Besides Donations); So How Do They Do It?
What is the No. 1 way nonprofits make money? If you guessed “through donations,” you’re not alone ... but you’re also not right.
The No. 1 way a nonprofit makes money is by charging for goods and services, according to the Midwest Center for Nonprofit Leadership, a program of the University of Missouri – Kansas City, which specializes in helping social enterprises start and grow in KC.
If you’re thinking about starting a nonprofit business, one of the first things you’ll want to figure out is how you make money. To help you brainstorm, we invited David Renz, director of the center, to introduce many of the revenue streams available to nonprofits and what sorts of questions you should ask as you’re creating your social enterprise business model.
If you’re curious about how to start a nonprofit or business or want to take it to the next level, tell us a bit about yourself and we’ll assemble your free Personal Action Plan.
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Funding streams for nonprofit businesses
At the end of the day, nonprofit businesses are just like for-profit businesses: They have to have more money come in the door than goes out. That said, nonprofit businesses are often focused on problems the free market doesn’t address (like homelessness or youth education). There are many revenue streams to consider. They include:
- Ad hoc cash donations: one-time giving opportunities (e.g., collection plate)
Gifts of cash: unrestricted monetary donations toward your mission
Gifts of property: bulk item (e.g., car or building) donation
Grants (foundation): usually project-based and outcome-oriented
Grants (government departments): contractual relationship with department
Grants (government earmarks): nonprofit is written into government budget
Dedicated revenues (taxes & levies): public commitment to the nonprofit’s services
Endowment: income made on an investment that is used by a nonprofit
Earned income (fee for service): charging the customer for services provided
Earned income (contracts for services): usually project based and outcome oriented
Earned income (trade/sales): money made by selling goods or services
Debt: a loan or bond, repaid with interest
- In-kind: a donation of services (e.g., pro bono accounting)
Remember, making any of these revenue streams viable is going to take time, planning, cultivation and a lot of hiccups. Nonprofits are often run with a mix of funding streams, and the person in charge of keeping the money coming must be diligent. If you are that person, here are a few more questions to keep in mind.
Basic questions when evaluating nonprofit funding
When you plan how you’ll fund your nonprofit, here are a few questions to consider:
Want to learn more about how to organize your nonprofit for successful fundraising? In late August, the Midwest Center for Nonprofit Leadership is starting its program that will answer all the questions you have around that topic. More information here.
Who pays? A simple question but a very important one when it’s time to sign the check. Understanding as much as possible about the payer’s intentions and trajectory could inform how you plan.
How does the money come in? Another 101 question that you’d hate to get wrong. Make sure your nonprofit is formed and you have the 501(c)(3) tax status in place. Then, have a goal to make contributions convenient, meaningful and secure.
How reliable is the donation? If you’re planning years out, you’ll want to project if you’re getting a one-time influx of cash or if this is recurring funding (whether based on performance or not).
What level of autonomy does the donation provide? Does a donation have a lot of stipulations and expected outcomes, or is it free for you to use in line with your mission? No matter the answer, make sure systems are in place to support it.
What are the pros and cons of the transaction? You read that right: There are cons to some transactions. Time spent on one priority effects others, and everything has long-term consequences. Make sure you’re thinking through how getting money today makes you stronger and better off tomorrow.
Photo courtesy of Joe Goldberg CC BY 2.0.
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