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Resources for the Nonprofit Manager - Relevant articles
Financing Your Nonprofit Organization
by Dennis R. Young, Bernard B. and Eugenia A. Ramsey Professor of Private Enterprise, Andrew Young School of Policy Studies, Georgia State University
(This article first appeared in the Center View newsletter).
Developing resources to support your nonprofit organization should not be an exercise in opportunism or serendipity. Success requires a coherent, well-conceived, focused strategy. Nor should your approach be apologetic. Nonprofit organizations produce real benefits to society; they deserve and require appropriate support. Rather than assuming a cup in hand posture, they should be proud salesmen of their wares. There are no magic bullets or one-size-fits all solutions to nonprofit resource development. Nonprofits must tailor their strategies to fit their individual missions and circumstances.
A recent project by eighteen nationally recognized scholars of nonprofit finance, organized by the National Center on Nonprofit Enterprise (www.nationalcne.org) was documented in a book, Financing Nonprofits, and published this year by AltaMira Press, www.altamirapress.com. It establishes the connections between the services and benefits produced by nonprofit organizations and the sources that best sustain their work. A notable finding is the wide variety of sources and the many different combinations of these sources. These sources include various forms of earned income, membership fees, gifts and grants from individuals as well as foundations and corporations, government funding, investment income, volunteer time, gifts-in-kind, borrowing and debt, and the trading of services and other resources. No other type of economic organization has such a wide spectrum of sources; hence, no other form has such an interesting financing challenge!
The key to an appropriate mix of income sources is to focus on the benefits your organization can or does produce, and to ask: “Who benefits and who might be asked to pay?” Benefits can be classified into four categories: private, group, public and trade. Private benefits are received primarily by individual consumers or clients, group benefits fall collectively on identifiable groups, public benefits are conferred widely on society as a whole, and trade benefits are conferred on individual or institutional partners. If a nonprofit understands the benefits it can produce, consistent with its mission and core competencies, it can begin designing its best financing strategy.
Consider some examples. An institute that does research on a rare disease produces potential benefits for those afflicted with that disease as well as others at risk. If the disease is rare and government support unlikely, appeal to relevant donor groups may be a more effective source. Alternatively, consider an early music ensemble that produces private benefits to those who attend its concerts or buy its CDs. It can partially support itself through ticket prices and sales. The ensemble also produces group benefits for music lovers who want the early music art form preserved and promoted. This ensemble can appeal for donations from the group of music lovers that overlaps without precisely duplicating its audiences. Indeed, performing arts organizations often feature a relatively equal balance of fee and gift revenue, reflecting these distinct kinds of benefits.
Finally, consider the case of a private college that benefits its students by enhancing their earning power and enriching their quality of life. The college also benefits a group of alumni who wish to see the value of their degrees preserved and enhanced. They can be asked for contributions to support those benefits. An educated population benefits society as a whole, as does faculty research. These societal benefits point to potential government support in the form of scholarships, student loans, and research grants. The college is capable of producing trade benefits in the form of recognition to donors in exchange for endowments which produce a forward stream of investment income. Therefore, institutions of higher education seek a healthy mix of tuitions, gifts and grants, government funding, and investment income.
Nonprofits should not develop benefits inconsistent with their mission just to attract income. Indeed, income initiatives can be costly if they undermine the mission or stray from an organization’s area of expertise and competency. Recognizing the stream of benefits that are consistent with its mission is a nonprofit’s initial step toward establishing a strong financial strategy.
Benefits are not the only consideration; issues of risk management and financial stability must also be addressed. Here is where diversification of income sources and the building of endowments can play a role. Smaller and newer organizations may not have the capacity to manage more than one or two sources of income. They need to attend to other priorities such as establishing reserve and working capital funds before embarking on the building of endowments. As an organization matures, it can diversify its sources of income and consider the possibility of building endowments to achieve financial stability and protect itself against the uncertainties of relying on any one income source.
Building endowment is a complex issue worthy of more space than is available here. Endowments permit organizations to produce benefits far into the future and they provide a fixed source of income. But, endowments themselves are associated with certain risks, such as unpredictable declines in stock market values and temptations to invade capital to finance budget deficits instead of addressing problems in a more fundamental way.
In summary, by thinking through the benefit implications of what your nonprofit organization does, or is capable of doing within its mission and core competencies, you can formulate a financing strategy that has the best chance of providing sufficient support in the short term, as well as long term growth and stability.
NOTE: This is the first of a series of articles by faculty associates of the Nonprofit Studies Program of the Andrew Young School of Policy Studies, Georgia State University. Each article highlights the practical implications for nonprofit organizations of faculty research. The NSP is pleased to partner with the Georgia Center for Nonprofits to provide this service.
