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Should all nonprofits generate revenue?
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Results so far:
| No | 40% | 158 votes | Total: 398 votes | |
| Yes | 60% | 240 votes |
No
by Thomas Schipani
Created on: June 12, 2008
No, it is not a requirement that non-profits generate revenue, in fact one needs to be careful about revenue generation in a non-profit or the quest for revenue can lead to unwanted incentives for management. The amount of revenue (if any!), how it is earned, why it is earned, and how much is earned are critical policy questions for the Board of the non-profit.
VALUE PROPOSITIONS:
In a commercial company it is clear that customers are paying for the products (and/or services) provided. The value proposition is simple. Company gives product to customer, customer gives money to company. The goal of a commercial company is to earn a financial return for the investors. More is better. Other aspects of the operation are constraints, that is, they are things that are required in order to make money for the shareholders.
For a non-profit the value proposition is fundamentally different because its goal is not to earn a financial return, it is to perform the stated purpose of the non-profit. Of course non-profits need funds (and other resources) to operate, but one must ensure that revenue generation is seen as a resource that is needed to achieve the organizational goal. Revenue generation can be viewed as a constraint to achieving the goal.
TWO HARES
A non-profit that pursues revenue generation for its own sake runs the risk of having two objectives. Which one do you chase? As per the old Japanese proverb, "who pursues two hares catches none". The non-profit must stick to its fundamental purpose as its goal.
DONORS
A non-profit is fundamentally more complex because the dimension of the donor is added. I use the word donor in it's broadest sense. (Anyone who provides funds, be it a donation or stock ownership, since they are not looking for a financial return, can be viewed as a donor.) A non-profit provides a product, but the person (or entity) who receives the product is not always the person who pays for the product, at least not in full. Donors end up paying for part of the bill. The person who receives the service might, if it's appropriate, pay something, and there may also be investment income from an endowment, government grant program or other source.
EXAMPLE
Take the case of a non-profit set up to help train workers affected by off-shoring of their manufacturing jobs. In a charitable non-profit, the organization can take in funds from donors and use the funds to train the workers. Is it appropriate to charge the workers for this training? If so, then how much? If you don't charge at all then it may limit how many people you can help. Conversely, if you charge too much, then you may help more people but you may also end up only helping those who have money, and may in fact miss out on your mission of helping those who need it most. The degree to which donor funds are used to subsidize operations is a critical policy decision for the non-profit. If revenue generation becomes a goal then the internal discussions needed to deal with this example will never occur. Instead, problems and unanswerable questions will come up with the effectiveness of the training program.
CONCLUSION
It is useful to apply the efficient approach of commercial companies in a non-profit. Revenue generation is one such tool. While there is nothing wrong with a non-profit that generates revenue there is also nothing wrong with one that does not. What is important is to focus on the goals of the particular non-profit and how they can be achieved.
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Yes
by Yvonne Donlon
Created on: September 06, 2009
Should all non-profits generate revenue?
To fully understand the answer, we have to fully understand the question.
First, what is revenue?
Revenue: For a company, this is the total amount of money received by the company for goods sold or services provided during a certain time period. It also includes all net sales, exchange of assets; interest and any other increase in owner's equity and is calculated before any expenses are subtracted. Net income can be calculated by subtracting expenses from revenue.
Non-profit: An incorporated organization which exists for educational or charitable reasons, and from which its shareholders or trustees do not benefit financially. Any money earned must be retained by the organization, and used for its own expenses, operations, and programs.
By those two definitions alone, it is apparent some revenue most be generated in order to meet the expenses. However, also by definition of non-profit, the revenue generated minus the expenses incurred in operations should and must be as close to zero as possible.
Let us not confuse revenue with profit. I run a 501( c )3 non-profit organization in the form of a home mission, with low-income housing, a food bank, and a thrift store. If one of the kind souls who was reading this decided to donate $100,000 tomorrow to our organization, I could not use it to disburse "bonuses" to all of our fantastic "volunteer" workers. Although I would consider it a windfall (by definition: a sudden and unexpected piece of good fortune), I could not and must not treat it as a windfall "profit". It must and would be used for the organization's expenses, operations and/or its programs.
However, that same $100,000 is considered revenue. The fact that it must be retained by the organization for its own expenses, operations, and programs, does not erase the fact that the $100,000 donation was "revenue" generated - perhaps generated by a fund-raising drive or a simple plea, and the kind heart of the donating party, but generated nonetheless. And revenue, without doubt.
Even if that $100,000 was placed in the Endowment Fund of our organization, the interest or gain in the fund is still retained by the organization and used in the same non-profit ways: for expenses, operations and programs. However, the donating individual, whose 100k was placed in the endowment fund, would not and cannot receive any dividends as a result of his "investment" in our organization. However, the good news for the donating party is this - his original donation does in fact continue to generate revenue as long as the Fund exists and is accruing interest. On our part, we are limited to using the interest generating by his 100K - and again only for expenses, operations and programs. The original 100k remains in the Fund throughout its existence. Is the interest on his 100k revenue? Yes.
Non-profit organizations are private as opposed to governmental; non-profit distributing (there are no dividends received by investors); self-governing; voluntary; and of the public benefit. They must generate revenue to meet their operating costs and program costs. Donations and contributions are revenue generated. It is used for the public benefit.
Revenue, yes. For the benefit of the public, yes. Profit, no.
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