Five Minutes for Finance - Earned Revenue
Understanding Earned Revenue for Nonprofit Organizations
Nonprofit organizations are primarily funded through donations, grants, and fundraising efforts, but there's another crucial source of income: earned revenue. Unlike donations or grants, earned revenue refers to the money nonprofits generate through activities directly tied to the goods or services they provide. This can include fees for services, product sales, or even membership dues. In this article, we'll explore what earned revenue is, why it's important, and how nonprofits can effectively incorporate it into their funding strategies.
What is Earned Revenue?
Earned revenue is the income a nonprofit generates from activities or programs that provide value in exchange for payment. It’s money received for products sold or services rendered, as opposed to donations or grants, which typically come with fewer strings attached and are often not based on any direct transaction of goods or services.
For example, a nonprofit arts organization might generate earned revenue by charging for tickets to performances, while a food bank could generate revenue by selling excess food to local businesses. Other forms of earned revenue include:
Government Contracts: Nonprofit organizations can enter into contracts with local, state, and federal governments to provide services on their behalf. For example, an organization can enter into a contract with a county government to provide mental health services to particular populations. The contract would typically cover the costs of the staff providing the services and the related operating costs (e.g., office supplies, rent, equipment, and administrative overhead).
Program Fees: Fees charged to clients for services such as educational programs, counseling, or job training.
Sales of Goods: Nonprofits can sell merchandise or products tied to their mission, such as fair-trade goods or artwork created by community members.
Membership Dues: Nonprofits with membership-based models often earn revenue through annual dues paid by members.
Service Fees: Some nonprofits provide specialized services (e.g., consulting, technical assistance) and charge fees for those services.
Why is Earned Revenue Important?
While donations and grants are vital for nonprofits, relying solely on them can create financial instability. Earned revenue offers several important advantages:
Financial Sustainability: By diversifying their income streams, nonprofits can reduce their dependence on unpredictable funding sources like grants and donations, which may fluctuate from year to year. Having a stable earned revenue stream can provide more reliable funding for mission-driven work.
Alignment with Mission: Earned revenue activities often align directly with a nonprofit’s mission, helping the organization deepen its impact. For example, a health-focused nonprofit might generate earned revenue by offering wellness workshops to individuals or businesses, which ties into their overall goal of improving public health.
Greater Flexibility: Earned revenue gives nonprofits more flexibility in how they allocate funds, as these revenues typically don't come with the restrictions that donations or grants might have. This can be especially helpful when supporting operations or expanding programs that align with the organization’s objectives.
Market Validation: When people pay for a service or product, it can be an indicator that the organization is meeting a community need or providing something of value. This can provide nonprofits with feedback and validation, and sometimes even new opportunities for growth and partnerships.
How Nonprofits Can Leverage Earned Revenue
Successfully generating earned revenue requires nonprofits to be innovative and strategic. Here are some practical tips on how to do this:
Identify Core Strengths and Services: Look at the nonprofit’s mission and consider what programs or services could be monetized. If an organization is already offering education or counseling services, for example, charging a reasonable fee for those services could bring in additional revenue while still serving the community.
Understand the Market: Before diving into earned revenue activities, nonprofits need to research their audience and determine what people are willing to pay for. For example, offering a high-end training program might work in a more affluent community, while offering basic workshops or community services might be a better fit in lower-income areas.
Ensure Affordability and Access: A key principle for nonprofits is to ensure that earned revenue does not restrict access to essential services for the populations they aim to serve. Sliding scale fees or scholarships can help ensure that low-income individuals are still able to benefit from the services provided.
Marketing and Promotion: Generating earned revenue often requires a shift in mindset toward marketing and promotion. Nonprofits may need to invest time and resources into reaching potential customers and demonstrating the value of the services or products they’re offering. This could include using social media, newsletters, and other outreach methods.
Measure and Monitor: Just like any other business activity, it’s important to track earned revenue activities carefully. By monitoring revenue streams, nonprofits can adjust their offerings, prices, or marketing strategies to improve profitability and effectiveness.
Create Partnerships: In some cases, nonprofits can partner with for-profit businesses to offer services or products. For example, a nonprofit that provides job training could collaborate with local businesses to offer placement services, earning a fee for successful placements.
Challenges of Earned Revenue for Nonprofits
While earned revenue offers many benefits, there are also challenges. These include:
Resource Allocation: Monetizing services or products requires investment in infrastructure, staff, and marketing. For nonprofits that are already stretched thin, this could be a significant challenge.
Mission Drift: There’s a risk of straying from the organization's core mission when pursuing earned revenue opportunities. It’s important that any earned revenue activity aligns with the nonprofit's overall goals and values.
Competition: Nonprofits entering a market to sell services or products may face competition from for-profit organizations with larger budgets and greater capacity to scale.
Tax Implications: Nonprofits need to be mindful of tax regulations when generating earned income. In some cases, the revenue could be subject to unrelated business income tax (UBIT) if it’s not directly related to the nonprofit’s mission.
Conclusion
Earned revenue can play a crucial role in the financial health and sustainability of nonprofit organizations. By diversifying income sources and tapping into the value they offer to the community, nonprofits can increase their financial independence and continue to make an impact. However, to successfully leverage earned revenue, nonprofits must be strategic, mindful of their mission, and willing to invest in resources that allow them to generate revenue without sacrificing their core values.
Nonprofits that successfully balance earned revenue with their charitable goals not only strengthen their financial position but also broaden their reach and enhance their long-term impact.
About this Series
Subsequent articles in this series will cover other topics related to nonprofit financial management. Here is a list of, with links to, previous articles:
About the Author
For over 30 years, Robert Pascual has been a leader in nonprofit financial management as a CFO, consultant, conference speaker and educator. He holds an MBA from the Haas School of Business at the University of California and is the founder and principal of Robert Pascual, MBA LLC. He has worked with small, mid-size, and large nonprofit organizations spanning the fields of education, workforce development, housing, health, philanthropy, social services, media, fiscal sponsorship, nature, and the environment. Each of these organizations has faced both unique and common challenges, some of which are probably similar to ones that you wrestle with.