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Jun 26, 2012

Profits and Nonprofits – A Continuing Mythology

This year I was pleased to be the keynote speaker for Columbus Business First’s Corporate Caring Awards.  This event celebrates the many ways in which companies, and especially their employees, give back to the community through their support of local nonprofits.  My message that day was that there are additional ways in which companies can help nonprofits.  One of those ways is to bring their business start-up skills to the nonprofits.  Why?  Because all nonprofits need to continually develop their earned income.

In general, this argument was well received, but I want to address one critical comment that reflects a continuing myth about nonprofits:  the myth that nonprofits should lose money and fundraise to fill their operating deficits.  The criticism took issue with “putting the responsibility all back on the nonprofit to earn their own way rather than encouraging generous giving to those with needs who can’t earn their way.”  The feedback went on to say, “Sure, volunteers can work to earn money to support a nonprofit through fundraisers, but telling them to start a business disqualifies them as a nonprofit as far as I am concerned.”

First, a nonprofit is a tax status, not a business status.  There is nothing in the law that says a 501(c)(3) must lose money or be unprofitable.  The law only requires that a substantial portion of effort be devoted to the exempt purpose which warranted the 501(c)(3) certification.  Nonprofit 501(c)(3) does exempt the organization from federal and usually state/local taxation and provides tax breaks to donors.  Why?  Because they do something that society needs but which the for-profit sector can’t do or can’t do well enough.  So, yes, the main purpose a nonprofit is created is to do something that can’t make money.  And that is where fundraising starts.

But the reality is that fundraising has maintained a pretty constant 20%-25% of nonprofit revenues since 1983.  Even in the boom 1990s it didn’t go above 25%.  Investment income maxes out at 5%.  So at least 70% of revenues of nonprofits come from fees and contractual payments for goods and services.  Some categories of nonprofits survive with less than 70%:  cultural organizations run about 30% (but read all the articles about their financial problems) and human service organizations survive with about 51% earned revenues.  Perhaps a lucky few have limited losses so fundraising can fill the gap.  But to thrive you need cash reserves and reserves for major repairs, etc.  Reserves don’t grow on trees; they grow from operating surpluses!  It is rare that a nonprofit actually fundraises enough to have a steady surplus.

If we look at the nonprofits who are thriving we will ALWAYS see activities which are profitable.  We see this in hospitals, colleges, zoos, botanical gardens, museums, performing arts organizations, and social services organizations.  In my consulting practice, I have not yet encountered an organization that does not have at least one profitable activity.  EARNING A PROFIT DOES NOT DISQUALIFY ANY ORGANIZATION FROM BEING A 501(C)(3), A “NONPROFIT.”

A nonprofit needs to fundraise AND earn revenues.  Fundraisers are fine, but they are not enough.  Holding out one’s hands creates an image of begging that overwhelms donors with an image that the obligation of financial sustainability rests on the donors shoulders.  No – the obligation to generate revenue and surpluses rests on the nonprofit’s shoulders.  That obligation mandates both fundraising and creating profitable activities as the joint strategy to support the financial losses of doing a key mission activity well.  Donors in the US are generous — they just can’t be expected to do more than they have ever been able to do in the past.

Read more about these challenges in thinking about the role of philanthropy in More Than Just Money (pp.157-200) and about what’s next for nonprofit (pp.201-216).  If you really  need persuasion, let me present your group with my talk “The New Definition of a Successful Nonprofit -or- Stop Getting in the Way of Fulfilling Your Mission”.