Does your organization’s budget depend heavily on a signature activity or one big event, which could be easily affected by weather, timing, or competing activities? Is the biggest percentage of revenues tied to individual or corporate donations that vary from one year to the next? Diversifying the organization’s income beyond direct fundraising can provide short-term economic stability as well as long-term viability .
Nonprofits have a variety of options for generating revenue, including the following.
Corporate sponsorships. For years, corporations have signed up to support a particular cause or effort. Eat a particular cereal, and you support the U.S. Olympic Team. Drink a specific brand of coffee, and you help save the rainforest. Purchase a certain piece of clothing, and you can aid a children’s welfare organization. In fact, several research studies have confirmed that consumers are more likely to purchase products from companies that exhibit active community involvement. In addition, employees whose companies team up with nonprofits usually feel a greater loyalty to their employers.
Corporate sponsorships typically involve a specific product or signature event, although sometimes they apply to an organization’s activities in general. They don’t necessarily have to take the form of a cash donation. An airline, for example, may wish to provide corporate sponsorship by providing several round-trip tickets each year, which your organization can use as prizes. Some organizations have formalized corporate sponsorship programs with specified levels of involvement. That is, as a company invests more with the organization, it moves up the sponsorship ladder and in return receives additional recognition and public acknowledgments.
Note: The Internal Revenue Service keeps close watch on sponsorships, which, unlike advertising, are not subject to unrelated business income tax. Therefore recognition of sponsorships is allowed, provided it does not constitute advertising by granting substantial benefits to the company in return.
Affinity programs. Whether offered by credit card, car rental, or overnight shipping companies, affinity programs pay royalties to the nonprofits in return for use of their names, logos, and mailing lists. If someone carries a credit card with your organization’s logo, for instance, you’ll receive a royalty every time the card is used. These programs differ from sponsorships because they are not custom-crafted. Affinity programs typically offer a one size fits all solution for which the nonprofit simply signs up as a participant.
Revenue’sharing programs. Found often on the Internet, these programs involve a merchant or retailer of goods and services paying a royalty or commission to the Web site’s owner based on leads, referrals, or actual sales.
Licensing agreements. Through licensing, you give a company or another nonprofit the right to use the organization’s intellectual property (such as a trademarked or copyrighted name, logo, slogan, or products) in exchange for royalties. Licensing agreements are often part of revenue-sharing and affinity programs, but they can stand on their own as well.
Cause’related marketing. In this situation, a corporation makes a designated contribution to the nonprofit organization every time a customer makes a particular purchase. A restaurant, for example, might donate $1 to your organization for every steak dinner it sells or donate 1 percent of its total sales on a particular evening. Typically, the nonprofit organization is mentioned in the company’s advertising and promotional materials, which can boost visibility of its mission. Just be sure that you are not linking your organization’s good name and reputation with a company that might undermine that very mission. For instance, a health-related organization probably wouldn’t want to partner with a company connected to the manufacturing or distribution of tobacco or alcohol products. The connections are not always obvious, especially with multinational corporations, so research potential partners carefully before undertaking any cause-related marketing.
Entrepreneurial ventures. Your organization may have the expertise to launch its own business or commercial enterprise that addresses unmet needs within the community or sector. Often, a nonprofit’s venture into the business marketplace is a natural extension of something it was already doing such as a homeless shelter opening an employment agency. In fact, the board should ensure that any commercial or business venture supports or advances the main reason the organization exists.
Some organizations self-finance such a venture by drawing on their reserves or redirecting funds from another activity. Others take a pure business approach and obtain traditional bank financing, usually using reserves or building equity as collateral. You might even be able to tap into a venture philanthropy source a funder that provides technical assistance or consulting, as well as dollars, to assist nonprofits with ventures that have a promise of sustain-ability for the long term. Such funding typically comes with specific conditions the nonprofit must meet.
The board should ask staff to undertake a feasibility study, which includes preparing a financial analysis with projected expenses, revenues, implications for unrelated business income tax, and a break-even point for the business venture. These projections, when considered as part of your organization’s financial picture, and the nature of the venture itself (how closely related it is to your mission and purpose) will help you decide whether setting up a for-profit subsidiary may be the best route to take . The feasibility study can form the foundation for a detailed business plan to guide the new venture.
Although the board must approve the policies governing the types of income-generating activities undertaken by the organization, it should hold the chief executive accountable for overseeing all those efforts. The chief executive’s duties should include approving contracts, approving the promotional language and images used in marketing efforts, tracking royalty or sponsorship payments to the organization, and ensuring that corporate sponsors or supporters are properly acknowledged.
SUQQESTED ACTION STEPS
1. Board members, appoint a business ventures task group, consisting of staff, board members, and other stakeholders, to analyze the feasibility of generating revenues through other means.
2. Board members, benchmark what other nonprofits are doing in your community and across the nation. Discuss what lessons you have drawn from reviewing others missteps and successes.
3. Board members, develop policies to guide staff members on such issues as selecting appropriate partners, using the organization’s name and logo, and providing recognition.
4. Board members, before pursuing a business venture, require the staff to develop a full-blown business plan for presentation to board members and potential funders.