By Peter Brill and Mariah Miller
The Santa Barbara Foundation plans to create an institution with programs providing technical support to nonprofits. Based on our research, we believe it is essential for part of that effort to include a program providing them with technical support in developing alternative sources of funding through additional revenues and, where appropriate, profitable services.
Non-profits use a variety of different sources of funds. The sources of funding in nonprofits are completely dependent on the knowledge and skills of staff and, as such, they may not be able to utilize the full range of potential types of funding. [i] In particular, when staff do not have the skills to develop earned income activities, the nonprofit cannot access this valuable funding stream. Yet earned income is already an important funding source and common phenomenon for nonprofits in some sectors. For example, many museums and hospitals rely on earned income and have even become significant competitors for their for-profit counterparts.[ii] Earned income is increasingly being used or considered by nonprofits with other missions as well, including employment training, community and economic development, children and youth, rehabilitative services, homelessness, advocacy, education, substance abuse, elderly, health services, environment and animals, and disaster relief.[iii] The earned income programs include thrift stores, employee training, clerical services, light manufacturing, consulting, property management, packaging, help hotlines, maintenance, food services, recycling and ecommerce.[iv]
Nonprofits are adapting earned income strategies for three reasons. First, nonprofits have adopted these strategies following contact with and learning from for-profit business, whether acting in collaboration with them for mutual benefit or as competitors addressing the same issues. Second, nonprofit human resources are different from what was common in the past. Now, nonprofit managers are more likely to have business skills and nonprofit boards are more likely to include directors with business training.[v] Having these skills enables non-profits to utilize earned income strategies more effectively. Finally, the funding challenges nonprofits are facing has led them to explore more funding sources than the traditional sources of grants and donations, including earned income.
Generating earned income requires different skills from the other common funding sources.[vi] Training for nonprofits at all levels, from the Board of Trustees to volunteers, can open up this possible funding stream for nonprofits that have not traditionally accessed this kind of funding.
How nonprofits earn income
There are many ways that nonprofits can earn income. They can charge membership fees or dues or charge fees for services they already provide. They can develop a product related to their service or fund their nonprofit activities with an unrelated for-profit business. They can sell merchandise or sell their own experience by consulting to other nonprofits or even governments aiming to address a similar social mission. They can continue to operate as nonprofits integrating for-profit activities as part of their own operations, establish for-profit subsidiaries, develop a partnership or joint venture or reincorporate with a hybrid structure, including benefit corporations, flexible purpose corporations, social purpose corporations, or low profit limited liability companies.[vii]
Benefits of earned income
Having earned income can benefit nonprofits in a variety of ways. First, it can free up resources focused on fundraising. This could enable skilled employees to use their talents more fully to address the social mission, or change the priorities in board recruitment or hiring decisions to have a wider range of skills represented. Additionally, earned income activities could benefit nonprofits by attracting talented staff if they enable them to increase salaries or to develop or use skills perceived by staff as useful for their career development.[viii] If earned income increases the stability of funding or the amount of funds available, then it can benefit the nonprofit by allowing it to develop activities that require more stable, substantial revenue streams than are typically available. This includes better long-term planning in general, the possibility to engage in research and development or projects that take a longer time to realize or to operate with a larger scale. Having a more diversified revenue stream, especially if it is a revenue stream with fewer conditions on use, could enable the nonprofit to focus on serving their beneficiaries. Finally, pursuing earned income can lead to improved public relations and marketing, productive organizational change and better service to beneficiaries.[ix] It may also enable nonprofits to improve their ability to obtain traditional funding. Foundations in particular value these strategies and have extended the length of their commitments to support nonprofits using these strategies.
Challenges of earned income
Earned income also presents new challenges to nonprofits. First, making a business plan and evaluating its potential may be unfamiliar to employees. Even employees with business backgrounds may not anticipate the unique challenges involved in integrating earning income with delivering on the social mission. This is an organizational change that entails learning to think about customers in addition to the theory of change and requires new tools to discuss the strengths of the organization and to understand its financial model. As change can be slow, support and accompanying change makers is needed.
Once the earned income activity is in progress, there are challenges to maintain it, as with any business venture, and there is the additional challenge of resource allocation to address both the ongoing delivery of activities that further the social mission and meeting the needs of the earned income activity to continue in operation when it is not performing well. A nonprofit generating earned income faces the problem of potential mission creep, or losing focus on their mission[x], but a nonprofit focused on meeting the priorities of too many donors also risks losing sight of their mission.[xi]
For these reasons, training programs can benefit nonprofits seeking to develop earned income activities. There has been a great deal of knowledge developed in the last 20 years in how to help nonprofits develop alternative funding. These programs should focus on evaluating earned income as part of the nonprofits strategic development in a holistic manner as well as including specific training to develop the skills required for planning and marketing a product or service. Even board members and staff with business backgrounds might benefit from sessions on the difference between earned income in nonprofits and in a business. They need to know how to avoid challenges specific to nonprofit earned income and address mission creep, as well as other unique challenges in the case that it arises. Programs can also be developed to address various stages of earned income generation: basic ideas to provide a general introduction, accompanying nonprofits in developing a business plan and initiating the activity, and ongoing assistance and support. Experience sharing between NGOs who participate in the program, the possibility to access long-term advice and support, and the skills acquired may benefit nonprofits even if they decide not to pursue earned income immediately. This enables them to better manage the cultural change process in their organization.
There are already examples of earned income training programs and training programs for social enterprises, which have similar challenges of aligning revenue generation with social impact. The Community Foundation for Southeast Michigan has a nonprofit capacity building program which supports business and leadership training primarily through grants for attendance at training programs.[xii] The Western New York Foundation selects nonprofits for a complete capacity assessment program, which includes evaluation of long-term resources and how to stabilize and develop them.[xiii] There are also many foundations providing support to social enterprises.
There are already examples of California nonprofits generating earned income. Based in Los Angeles, Chrysalis is a nonprofit with a for-profit business that addresses homelessness through job training and placement[xiv]. In San Bernardino, Neighborhood Housing Services of the Inland Empire (NHSIE) aims to make homeownership accessible. Participation in a training program has increased their earned income to the point that it now exceeds other revenue streams[xv]. In San Francisco, Asian Neighborhood Design has used earned income for a wide variety of activities since it was founded in the early 1970s[xvi]. Founded in San Diego in 1993, The ReUse People has expanded nationally and even internationally, opening in Canada in 2018[xvii]. They focus on deconstruction, sales of used housing materials and job training for unemployed or underemployed individuals.
Earned income has helped these nonprofits to better realize their social mission. Training programs can make this a more feasible reality for nonprofits in the Santa Barbara region as well.