Is Earned Income Right for Your Nonprofit? – Part 1
Nonprofit organizations are increasingly looking for funds that still meet their mission but are more stable than annual campaigns and grant funding. One method of fund generation that has become increasingly popular over the past decade is earned income. Earned income comes in many forms and by many names, such as social enterprise, cottage industry, venturing, business spin-offs, enterprise endeavors and many more. Undertaking an earned income effort isn’t something that happens overnight and is not without it’s challenges, but it can certainly be a worthwhile effort if successful.
One Nonprofit’s Earned Income Story
In 2007, I joined the board of God’s Closet, an organization that provided professional clothing and image consulting to women reentering the workforce after crisis situations. Following the financial crisis as well as other local events, many companies changed hiring policies to no longer hire individuals with felony backgrounds. This made finding employment difficult for many of the women we served.
In 2009, the organization’s founder and I started The Purple Lunchbox, a social enterprise catering business. The Purple Lunchbox’s purpose was to provide opportunities for training and employment, in addition to breakfast, lunch and special event catering
Over the 4 years we ran the program, we provided over 30 women with employment at above minimum wage levels and provided training to over 250 women. The revenue generated from the venture paid staff salaries and covered the supplies, permits, and other items needed to run the operation.
While we considered The Purple Lunchbox effort a successful one, it was certainly a feat to accomplish. The organization was solely volunteer run and commanded a lot of time and energy from board members and the founder. Taking on a social enterprise may not be for everyone, but it can be a great way to diversify revenue streams. But first off, an earned income strategy will most likely not be successful if you go into the effort with a business idea already in mind. There are a lot of things to consider before you even look at a specific venture.
Know What You Are Getting Into
Earned income can be favorable because it provides unrestricted funds, aids in self-sufficiency, diversifies revenue and can increase an organization’s visibility in the community. An organization’s leadership, both staff and volunteer, need to fully understand the pros, cons, and risks of the proposed venture.
First and foremost, everyone has to understand that taking on an earned income strategy is a business. This is usually the hardest part to grasp for board members and staff because they are so mission focused. While earned income supports the mission, the point is to generate income. When it comes to running a business, you have to have the experience on staff or get it – and pay people competitively for what they bring to the table. You also will have to have some sort of up-front investment, whether that’s cash, time, building space, equipment. And above all, there has to be a functional business model and plan.
Key Considerations for an Earned Income Strategy
- Does your organization have the culture (internal and external) and the capability to take on an earned income strategy?
- Do you have (or have access to) the assets you need for plans? Not only cash but also buildings and equipment?
- Are there core customers that can immediately support your ideas and endeavors?
What Can We Do (Idea Generation)?
Choosing a particular earned income strategy for your organization will depend on two things:
The amount of work and risk involved in implementing an earned income strategy will hinge on the combination of these elements:
If your organization already has a service or product and can identify ways to gain income, you will have a lower level of risk and it will take less effort to implement. For example, if already have a fee-for-service program, look for ways to decrease your costs to improve profits from your current efforts. Do you have a great, well-recognized program? Look for ways to add and expand services or products for existing customers and opportunities to sell your existing services or products to other organizations.
Look at the donor and volunteer base you already have, the involvement of your community and your existing reputation. Is there something they would be willing to buy from you if you started selling it? Maybe you are an animal shelter – would your constituents be more likely to buy their dog and cat toys from you rather than a box store? Probably. Or do you serve children through after school programs? I’d be more likely to buy my thank you notes or birthday cards if I knew local kids made or designed them.
Start with the Mission
With The Purple Lunchbox, our goal, first and foremost, was to provide our clients with employment. To bring it all together took more than and idea. We had a partner that provided access to a commercial kitchen. We had the necessary skill sets among board members and other volunteers to teach participants cooking and catering skills. While we knew competition from national chains and local restaurants was heavy, we knew the additional mission of serving women would appeal to many customers. We priced competitively, and in some cases a little more than other companies based on our costs. More often than not, our customers initially hired us based on our goal of providing employment. They continued to hire us because of a combination of our mission and the quality of our product and service. It is a business.
In Part 2 of this 2 part series, we’ll cover tax implications (UBTI) and what should be considered in a earned income feasibility analysis.
Ericka will a Guest on GrantChat on 9/1/15 at 12:00 Noon to talk about earned income with the GrantChat community. We hope you will join us.
Ericka Harney, CFRE, GPC, CVA* is the Executive Director of the Accounting & Financial Women’s Alliance (AFWA) and The Foundation of AFWA. Born with an entrepreneurial drive and passion for service, Ericka has over 15 years of professional experience in the nonprofit and business sectors. (*While she knows some stuff, Ericka is also not an attorney nor an accountant/CPA. Please consult legal counsel and financial advice when considering a business venture.)