There are diverse opinions regarding the benefits and appropriateness of earned income ventures within nonprofit organizations. Do they or don't they represent a viable strategy to help sustain and advance a social mission? The following is an attempt to separate the hype from the reality and to help you make more informed decisions for your organization. Consider the following:
Commercial activity is not new to the sector
Nonprofits' use of commercial activities to finance their missions is as old as the nonprofit sector itself. Long before the first Goodwill Thrift Store, religious abbeys were selling wine and cheese, actors' guilds were charging admission fees, and charities were selling baked goods to supplement donations.
Though often excluded from discussions of social enterprise, institutions of higher education and nonprofit hospitals have generated billions of dollars in earned income over the decades. It appears that only the more recent expansion of commercial activities to the diverse community of local nonprofits has generated alarm from some sources and the charge that the social enterprise movement is mostly "hype".
Commercial revenue for our purposes encompasses service fees, registrations, dues and subscriptions and other program fees, as well as income from special events and sales of product. Earned income is referred to as "Program Revenue" in annual tax filings and includes such things as government contracts and/or fees for work performed. It excludes government grants (loosely designated support for a nonprofit program or mission that brings no immediate quid pro quo benefit to the donor).
Commercial activity has been a major and steadily increasing revenue generator for nonprofits. In 1982 commercial revenue accounted for 48.1% of total nonprofit revenue (estimated at $78,880,091,482) but by 2002 it accounted for 57.6% (estimated at $251,695,205,038). This represented an overall increase of 219% and an average annual increase of 9.87%.* (Percentages vary by nonprofit subsector, such as human services, housing, arts, and environment.)
What critics are saying about social enterprise
A number of articles in the past couple of years have addressed the question of whether commercial activity is a desirable revenue source for nonprofits.
In 2005 an article in the Harvard Business Review titled 'Should Nonprofits Seek Profits?' noted that a number of foundations have aggressively promoted earned income as a means to "sustainability" or greater financial self-sufficiency. The article went on to outline a host of reasons for skepticism about the case for earned income, citing 'unrealistic expectations' for the earned income potential of commercial ventures by nonprofits as the unifying theme.
In June 2007 the SEEDCO Foundation published a similarly oriented report "The Limits of Social Enterprise' which argued that nonprofits running commercial businesses generally leads to frustration and failure, either of the venture itself or of its revenue projections.
In truth, these and other articles are not completely off the mark. Social enterprise is NOT a financial panacea for nonprofits, a strategy that will generate huge profits and free them quickly and completely from dependency on charitable gifts and grants.
The Reality
The reality is that social enterprise can be both risky and challenging and yet very much worthwhile.
- Earned income ventures by nonprofits generally do not free a nonprofit from other types of revenue, AND…they can diversify an organization's revenue sources, reduce reliance on vulnerable grants, and provide a source of income that is unrestricted and can be applied where the organization's mission and leadership deem most appropriate.
- Earned income ventures have never generated limitless profit, AND…they may supplement other income sources, finance the expansion of social services and often underwrite the overhead expenses no foundation will support.
- Launching and running a social enterprise is as risky as launching and running a business in the for-profit sector where the SBA reports new small businesses have a 50/50 chance of surviving the first five years, AND…nonprofits are no stranger to risk and in fact are commonly in the vanguard of those addressing seemingly intransigent, impossible problems. This potential for failure should no more be a deterrent to the nonprofit sector than it is in the for-profit sector. For nonprofit or for-profit alike, success depends on the synergy of key factors such as internal capacity, market demand, pricing, capitalization, competition and others.
- Social enterprise demands skill sets that may be lacking in a typical nonprofit, AND…a new generation of professionals, anxious to respond to the call for meaning in their lives, is increasingly interested in contributing their skills for greater purpose. The influx of market-oriented managers and staff trained in cost-accounting, marketing, product design and distribution, etc. has not only prepared many nonprofits for the rigors of the marketplace, but strengthened program quality and accountability at the same time.
- Social enterprise has the added challenge of managing to the 'double bottom line' of both mission and margin, AND…attention to both factors can result in more robust, high-performing organizations simultaneously addressing social needs not met by other sectors while maintaining their own sustainability. A social enterprise may achieve phenomenal social outcomes even when its revenues are covering only direct and indirect operating costs.
Therein rests the critical issue of perspective. If social enterprise is viewed solely from the perspective of profit, it may indeed not be a good fit for many nonprofits. Most nonprofits are not likely to become self-sufficient from social enterprise. However, in its capacity to generate new revenue while simultaneously advancing a social mission, social enterprise provides a breakthrough solution for the nonprofit constantly struggling to sustain mission-related activities with traditional fundraising.
The Bottom Line
Social enterprise is on the rise across the nonprofit sector. While human service and vocational training programs have taken the lead in the recent expansion of social enterprise (other than universities and hospitals), this is a strategy that should at least be examined by every nonprofit. For a few nonprofits, it has led to unimagined success and financial stability. For some, it has underwritten additions to service that were of little interest to foundations. And for others it has sustained vital programs in the midst of reductions from other funding sources. For all these reasons, earned income ventures represent an important strategy for nonprofits.
The Social Enterprise Alliance encourages all organizations to understand the potential risks and rewards before beginning a social enterprise. The global marketplace of products and services has changed our world, and we can harness that power to create stronger, more sustainable mission-based organizations. Our communities will benefit from more creative solutions, and innovative social enterprises can be an important means of addressing social issues that are not solved through the private sector alone.
*Data from Janelle A. Kerlin, Assistant Professor, Department of Public Administration and Urban Studies, Georgia State University and Tom H. Pollak, Center on Nonprofits and Philanthropy, The Urban Institute.
