Twenty years ago, it would have been shocking for the Chicago Children’s Choir to run a singing telegram business and a Ben & Jerry’s Scoop Shop or for Shelter, Inc., of Contra Costa County, a California organization dedicated to serving the homeless, to launch a property management firm. Today, it seems routine. Promoted in books and articles, conferences and courses, earned-income initiatives are becoming accepted—even expected—throughout the nonprofit world. In a 2003 Bridgespan Group survey of U.S. nonprofits’ executives, half of the respondents said they believed earned income would play an important or extremely important role in bolstering their organizations’ revenue in the future.
Should Nonprofits Seek Profits?
Reprint: R0502E
Twenty years ago, it would have been shocking for a children’s choir to sell singing telegrams or for an organization serving the homeless to dabble in property management. Today, it seems routine. Nonprofits increasingly feel compelled to launch earned-income ventures—not only to appear more disciplined and businesslike to stakeholders but also to reduce their reliance on fundraising.
There’s plenty of hype about the value of earned-income ventures in the nonprofit world, but such projects account for only a small share of funding in most nonprofit domains, and few of the ventures make money. Moreover, when the authors examined how nonprofits evaluate potential enterprises, they discovered a pattern of unwarranted optimism. The potential financial returns are often exaggerated, and the challenges of running a successful business are routinely discounted. But the biggest downside of such ventures is that they can distract nonprofits’ managers from their core social missions and, in some cases, even subvert those missions.
There are several reasons for the gap between the hype and the reality. One is that an organization’s nonfinancial concerns—such as a desire to hire the disadvantaged—can hamper it in the commercial marketplace. Another is that nonprofits’ executives tend to overlook the distinction between revenue and profit. For example, a youth services organization that had received funding to launch a food products enterprise hired young people and began making salad dressing. The nonprofit believed it spent $3.15 to produce each bottle of dressing that was sold for $3.50. But when expenses such as unused ingredients and managers’ salaries were factored in, the cost per bottle reached a staggering $90.
Earned-income ventures do have a role in the nonprofit sector, the authors say, but unrealistic expectations are distorting managers’ decisions, wasting precious resources, and leaving important social needs unmet.