Let’s be clear here. Profit and wealth accumulation are not dirty concepts in the nonprofit arena. They are needed constructs if you want your agency to get ahead.
Making a Profit
All making a profit means is a realization of positive net income, that is, revenues coming in are greater than expenses being paid out. Nonprofits need to realize profits to grow so they can meet more need and expand their mission. Positive net income is how organizations fund things like increases in organizational capacity including reserves, endowments, pay raises, and investments in technology. If you want to meet more mission, you need to fund these things. Which means creating and realizing more than a break-even budget, in other words, plan for and work towards making a profit.
So, how does a nonprofit make a profit, when government contracts only pay for actual expenses, foundations give no more than what is needed, business executives are not responsive to your requests, and you don’t have as many individual donors as you want? The answer is going after the holy grail of unrestricted funding, money that you can use to meet general operating, capital, and capacity building costs. The trouble is that general operating and capital grant money is scarce. While I recommend pursuing that type of funding, I do not recommend counting on it. It’s gravy if you can get it.
Which leaves individuals and businesses. About 80 percent of total charitable giving comes from individuals; 5 percent comes from businesses. So, if you are after unrestricted monies, I generally always recommend an emphasis on individual giving coupled with less of an emphasis on corporate giving.
Most nonprofits rely heavily on events to raise revenue from individuals and corporations. Yet, they do not run the numbers to see just how much money an event brings in, accounting for total, not just direct, costs. The average cost to raise $1 through an event is $.50, not including labor costs. Run your numbers. We talked about that in Evaluating the Success of Your Nonprofit Fundraising Events: Income, Impact, Costs and Benefits. How much money are you really making from your special events? Are you even making money? Oftentimes, an analysis like this brings to light that nonprofits are losing money on their fundraising events. Which means looking at other ways to increase unrestricted income.
Developing a program that involves reductions in costs and contributions of cash are the best ones for generating unrestricted revenues at the lowest costs. Which means designing fundraising income streams that involve employee volunteers, in-kind donations and gifts of equipment you can use, and vendor price negotiations, all of which result in a reduction of costs, leaving you more overall net income to work with. So, a good place to start looking for unrestricted revenues is to look at companies you do business with and give in these ways. And then go from there. We talked about developing relationships with businesses in What Businesses Want.
Then look at your individual donations. The average first-time donor retention rate hovers right around 23 percent. That means, on average, 77 of new donors this year will not give again next year. And it costs about six times more to acquire a new donor than retain one. Which means most nonprofits are spending a lot of resources recruiting new donors that don’t stay. An emphasis on donor retention may serve them better. While you do need an emphasis on donor recruitment, generally you need more of an emphasis on donor retention. Are you budgeting resources toward donor retention? Is increasing donor retention part of your development director’s job description? If not, you should be.
Accumulating Assets
Net income is not the whole story, though. To become financially strong, a nonprofit must build wealth too. Your agency needs wealth to be in a healthy financial position and achieve sustainability. You want to be able to use your assets to create more net income to invest in more assets which leads to more net income and so on.
Wealth is measured by net assets. Net assets are the amount of assets a nonprofit has after subtracting their debt, or liabilities. You grow your nonprofit’s net assets by setting aside a portion of your agency’s profits and investing in assets that appreciate in value over time without incurring an equivalent amount or more of debt. Endowments, buildings, real estate, pieces of art, and historical artifacts are all examples of assets that increase in value over time. The trick is in keeping the assets long enough that they appreciate and debt lower than the value of the assets.
Rome was not built in a day. Neither will a sustainable funding base. The key is setting aside a regular portion of positive net income into long-term assets. No matter how small your organization’s profits, you need to set aside a portion of them to invest in assets. And don’t forget about your as staff and infrastructure. You need to invest in them too. I like simple formulas, like a third into infrastructure, a third into staff, and a third into long-term assets. It takes a while, but eventually your efforts snowball.
Wrapping It Up
Are you ready to start your nonprofit’s path to sustainable funding? Budget to make a profit. Apply for but don’t count on general operating, capital and equipment, and capacity building grants. Analyze the true performance of your events, possibly replacing then with higher profit fundraising activities. Make deals with your vendors. Work on your donor retention just as much, if not more, than your donor acquisition. Set aside a portion of your profits, no matter how small the amount, and invest them in assets that appreciate over time. And watch your debt levels. Stick to your strategy over time. And you will find you can sustainability.
