Posted At: April 17, 2009 12:05 PM
by Erin Ireland, Contributing Writer
Donations are down, funding is cut and the tax incentive for giving has decreased. Thus, the forecast for nonprofits seems bleak. Anyone in the nonprofit world knows organizations must do something different to stay afloat but what?
Earned income, a transaction where money is received for a specific good or service, is one tactic to supplement a nonprofit’s lack of funding.
Earned income strategies
An organization’s earned income strategy should align with its mission and values. A nonprofit organization exists because it provides a good or service, and most likely (if it is successful), it provides it well. Nonprofits should think of two or three of their assets and how they can be turned into moneymaking ventures. Assets may be a special expertise, program or product already in place or a physical asset such as meeting space.
Organizations should then take what they already do well or have and turn it into a profitable venture. For example, Glenwood, an agency that specializes in serving children and adults with autism, sells assorted pecans through Pecans for a Purpose during the holidays. Another example is a program created by the Women’s Funding Network to evaluate grants. The software proved valuable to the organization, which realized its marketability to other nonprofits.
Charging for a good or service gives it value. Often times as organizations add an earned income strategy, donations increase because donors like to know they are giving to organizations that are sustainable and creative (Larson, 2009). Furthermore, monetizing your assets not only increases cash flow but also enhances the organization’s balance sheet.
Should your nonprofit venture into earned income?
The Society for Nonprofit Organizations lists a few pros and cons of earned income:
- There are no strings attached to the money you earn. You may use it however you wish.
- It allows you to be self-sufficient, not dependent on the “kindness of strangers.”
- It strengthens your organization by diversifying your offerings.
- It can help improve your organization’s image and visibility.
- It forces you to be sensitive to your customers, which will improve the way you serve your clients
- It is time-consuming to do the market research, prepare the business plan and come up with financial projections. But it’s vital that you do all these things before you start an earned income venture.
- You may have to educate board and staff members about what earned income is and what its advantages are. All must be committed to the idea of entrepreneurship.
- The caliber of management will make or break your enterprise. You must have top-quality, business-minded people and pay them accordingly.
- In most cases, you’ll need some money up-front.
- You need a cushion of cash on hand, or the ability to get a quick loan, to help you through inevitable down turns in the market.
- For-profit businesses may feel you’re competing unfairly and may challenge your tax-exempt status.
What does the IRS say about a nonprofit earning income?
According to Rolfe Larson (2009) of Rolfe Larson Associates, earned income can be classified into two categories: related and unrelated. Related earned income directly applies to your nonprofit’s mission statement; it is something you are already doing. For example, Women’s Funding Network’s grant software enabled the organization to improve its grant evaluation system. Unrelated earned income must meet the following three requirements: 1. Is a trade or business; 2. Is regularly carried out; and 3. Is not substantially related to the furtherance of the exempt purpose of the organization.
For example, Glenwood’s Pecans for a Purpose is not substantially related to its mission but is only carried out during the holidays. While you may have to pay some taxes on the profit of your venture, your organization will not lose its 501(c)3 status. If your organization is considering any earned income strategies a qualified professional should review tax laws.
Larson, R. (25 March 2009). “New sources of revenue: Starting a money making business inside your nonprofit.” NRCA Nonprofit Summit 2009. Cahaba Grand Conference Center, Birmingham, Ala.