Linking Mission to Money: A “Dual-Business” Model for Nonprofit Sustainability
Financially fit nonprofits need to have “two businesses under one roof,” explained visiting financial expert Allen Proctor at the Feb. 6 GCN/Bank of America community event. The path to sustainability requires profit-making initiatives that provide reliable funding for critical, but decidedly unprofitable, mission-focused work. Here, Proctor shares a “dual-business” vision for the sector.
Nonprofits must find a new business model.
Earned revenues have always constituted the majority of nonprofit revenues—and that shouldn’t change—but too often they come from government customers or large philanthropies. Unfortunately, many government contracts now lose money, and we cannot assume philanthropic giving will rebound any further than it has already—if it couldn’t break out of its historical average in the go-go years of the mid-1980s and late 1990s, why would it now?
Nonprofits work where the market system fails: when for-profits cannot make a profit meeting a community need. Therefore, every responsible nonprofit has a key mission that, if done well, loses money: basic research, emergency rooms, public access to education and art, care and feeding of the unfortunate and disabled. While a for-profit would drop the money-losing activities, the nonprofit exists to sustain those activities. That means nonprofits must develop enough profitable activities to cover the losses fundraising cannot, to reinvest in their businesses, and to build balance sheets strong enough to weather a recession.
In short, profit-making initiatives ensure that services are reliable and sustainable regardless of the economy.
As nonprofits, donors, and advocates, I see four ways we can foster this sustainability in the nonprofit sector:
By looking at nonprofits as two businesses operating under one roof. The first business provides high-quality services that cannot be operated profitably. We evaluate its success by how well it fulfills community needs. The second business runs profitable activities, and reinvests those profits into both businesses. We evaluate it by its profitability.
By being aware of how we support nonprofits. Unrestricted giving is the most useful to nonprofits, and closest in action to how for-profits raise capital. If we must restrict our gifts to certain uses, we need to cover the fully-loaded cost of the activity being funded, and consider adding a profit margin. We need to support strong balance sheets by rewarding nonprofits who are building reserves that sustain their operations and growth.
By providing training for nonprofit executives that teaches them to develop and evaluate business plans for profitable new activities.
- By creating new ways to invest capital in nonprofits, such as legislation that allows for low-profit limited liability companies (L3C) or benefit corporations, that expand the capital structures possible for new activities to include equity and low-interest loans as well as grants.
Using these strategies, nonprofits can break out of the uncertainty cycle that keeps them scrambling for funds, and can better serve the needs of the community. A sustainable nonprofit, operating under these four conditions and with a “dual-business” model, should feature the following:
A clear definition of key mission activities and the upper bound of financial losses acceptable for these activities.
The courage to reject money-losing “gifts,” i.e. grants and contracts that do not cover the fully-loaded costs of the activities they fund. (Ideally, this will push funders to pay for all costs of a program.)
Consistency in the share of charitable contributions in your revenue mix. (Maintaining the current share of contributions requires continuous effort, particularly in light of corporate philanthropy trends away from broad-based cash giving.)
An entrepreneurial approach to profitable activities that are lower in mission but based on the expertise and business infrastructure of the nonprofits’ core activities.
- Paring down marginally profitable activities and unprofitable activities not central to the nonprofit’s key mission.
When all stakeholders understand and support the nonprofit’s money-making responsibility, sustainability becomes a matter of day-to-day operations, rather than a hail-Mary pass at the tail end of a fiscal year. A mission can’t live on loss; to keep your nonprofit alive, you must plan to profit.
Worthington-based consultant Allen J. Proctor, former CFO of Harvard University, is the author of More Than Just Money: Practical and Provocative Steps to Nonprofit Success and the newly-released Linking Mission to Money: Second Edition. For more, visit linkingmissiontomoney.com.