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Add to FavoritesNo, 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.
Learn more about this author, Thomas Schipani.
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Yes
I'm not sure how a non-profit would be able to continue to operate if it didn't generate some level of revenue. What type of activity can be sustained without any funding? What would a non-profit be doing that it could do without any revenue whatsoever? It doesn't seem to me that it would be very valuable for society.
I've been on the boards of directors of several non-profits in the arts and education. Every one of these organizations needs revenue in order to fulfill our defined missions. And every one of these organizations can do even more (or do it better) if we had more revenue. We never suffer from a dearth of ideas - the dearth is always in resources such as time, personnel, and money.
This need for funding does not mean that a non-profit should become too focused on revenue. That's not the point. If revenue becomes the driving force, then that non-profit has perhaps been led astray.
There's another way in which revenue generation is a very good thing for non-profits: independence. A non-profit that has no revenue is very vulnerable to going out of business. What will sustain it when needs arise? Moreover, I believe that non-profits need multiple sources of revenue if they are to be truly secure. In other words, a non-profit that only survives through grants from foundations, or government support, or individual donations will be highly vulnerable if that source of funding dries up. Look at the economic downturn of 2008-09 for evidence; foundations that lost money in the stock market have slashed their grants, as have governments of all types, and the result is that groups that relied on those sources (such as shelters for the homeless and food banks) are in deep, deep trouble.
Let's consider a few examples of typical needs of non-profits, and see if any can be sustained without any revenue. Any non-profit that has office space, a building, or any physical presence would need revenue in order to pay the bills related to upkeep and improvement of that property. Any non-profit that has equipment would need to pay to maintain the equipment and to store and transport it; maybe it's a street theater company, which still needs to get out to wherever it's doing its work, and will need costumes and props. Any non-profit that provides a service would need something to help it provide the service, whether that's phone service for a suicide prevention hotline or books to help with a literacy-tutoring program.
In sum, it's impossible to think of a non-profit that can survive for very long without any form of revenue. It's possible that the organization's founders can keep things going in the early days by dipping into their own pockets (if one considers that not a source of revenue). But for a group to really reach its potential, it has to have some level of financial stability. It is impossible to get access to all of the necessary equipment and services, as well as to comply with laws such as filing tax returns, if an organization has no money.
The best non-profits realize that revenue is part of their mission. The best non-profits are not fearful or arrogant about the need to raise revenue; they turn this need into a virtue. They find ways to get the public excited about what they are doing and to feel a commitment that incorporates money, time, and effort. These non-profits use fund-raising efforts to also raise awareness about what they are doing and the needs they are serving, while bringing more potential supporters into their orbit. That's the goal that all non-profit leaders should strive to emulate.
Learn more about this author, B. B. James.
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