When is Earned Income Right for a Nonprofit?

Earned income for nonprofits, or the sale of goods and services, is a somewhat misunderstood and unexplored financial opportunity. Yet there are countless examples of nonprofit organizations that sell goods or services to supplement their revenue. These include Goodwill, the Girl Scouts, museum gift shops, hospitals, charter schools, theaters and many more.
Unfortunately there are many fears in the nonprofit sector about earned income. Some of these include fear that earned income will:

• Detract from the mission of the nonprofit
• Undermine the organization by introducing "market forces"
• Be too difficult or complex to manage
• Put their nonprofit status at risk

And if mismanaged, earned income has the potential to do some or all of these things, but so does any other mismanaged activity. Earned income is not right for every nonprofit, but every nonprofit should at the very least analyze whether earned income is a potential opportunity.

Let me be clear. Earned income is not a panacea, it cannot transform a shaky financial model into a sustainable resource engine, it cannot provide fast cash. Earned income should be explored only when your organization is relatively stable and you are planning for the long-term. Earned income ventures could take years to reach profitability.

Here are some questions to get you started in thinking about earned income. If you answer yes to a majority of these, you might consider earned income as potential new revenue source for your organization:

• Are we in a fairly stable financial situation?
• Do we have core assets that could be transformed into saleable products or services?
• Is there a potential market with a willingness and ability to pay for these products/services?
• Would the sale of these products/services be a compliment to, not a distraction from, our mission?
• Is our staff and board, for the most part, open to risk and experimentation?
• Do we have access to funders who could potentially provide some startup capital for an earned income venture?

Once a nonprofit decides to explore earned income, there is a multi-phased process to undertake which includes:

1. Analyzing assets to determine potential products/services to sell
2. Conducting market research to determine competitors and consumers
3. Pilot testing a product/service
4. Creating a business plan including marketing, staffing, financial model, risks and mitigations
5. Launching the business

One of my favorite examples of a nonprofit where earned income really works is English at Work. Its mission is to provide English language instruction at the worksite for employees of hotels, hospitals and restaurants. But the really interesting part is that it charges the hotels, hospitals and restaurants for these classes. The full costs of English at Work are not covered by those class fees, but the organization is working toward a financial model where 50 percent of its budget is funded by that earned income source. This is an example of a very successful, innovative and mission-tied earned income stream that will provide long-term financial sustainability. That's when earned income really works.

Nell Edgington is president of Social Velocity. Reach her at nell@socialvelocity.net Social Velocity will present the webinar "Financing Not Fundraising: Evaluating Earned Income" on May 23.