5 Key Points to Implementing a Successful Earned Income Strategy

2018-08-16

By Mark Matsuura, MBA'19 McDonough School of Business, Georgetown University

If you didn’t already know, earned income is all the rage in the nonprofit world. As nonprofit organizations grapple with greater competition and concerns about funding sustainability, they often consider employing commercial strategies to generate revenue. Certain organizations are well-suited to monetize their products or charge a fee for their services. Public universities depend on students paying tuition fees while museums charge visitors entrance fees. However, not all nonprofits can be so lucky, and the allure of earned income carries with it more risk and uncertainty.  

Consider a nonprofit that has identified an earned income venture worth pursuing. It appears to have a viable product that supports their mission. As the organization develops an implementation plan, it contemplates how to mitigate the myriad of risks involved and the best path forward. As it does so, there are several key considerations that should not be overlooked.

 

Act with Intention

It’s no secret that nonprofits operate on tight budgets. Driven by the appeal of generating self-sustaining income, they may enthusiastically turn to earned income as a solution. Enthusiasm is certainly important, but it shouldn’t be mistaken for action. This means obtaining more than just a rubber-stamped approval from the Board of Directors and setting aside a fixed percentage of the annual budget. Rather, earned income should be a meaningful component in the organization’s strategic plan. Leadership should ensure that the appropriate resources, both money and time, are allocated to the endeavor. Revenue-generating activities often require extra attention, and most nonprofits are not equipped to deal with risky new ventures. Employees may be asked to do more, which can be overwhelming and inefficient. Ultimately, a committed management team that acts with intention can help ensure that the appropriate attention is given to the project.

 

Find the Right Expertise

Generating sales or closely managing processes and costs are not typically a nonprofit’s forte. However, these competencies are fundamental to the success of any earned income activity. Nonprofits may be tempted to convert existing positions into roles that support an earned income model, but that may not always make sense. Nonprofits should not assume that their employees already have the required competencies. Not only does this potentially place employees in unqualified roles, but it can also hurt morale and result in unnecessary turnover. Whether it’s investing in new staff or providing the appropriate training for existing staff, nonprofits must equip themselves with the right tools to succeed.

 

Manage Costs Carefully

With grant funds or charitable donations, nonprofits can focus on mission-driven activities without the discipline required to maximize financial returns for investors. Of course, grants have indirect cost rates attached and donors aren’t particularly fond of high administrative costs, but a nonprofit’s priorities remain fundamentally different than that of a for-profit enterprise. Even for commercial entities, assessing the profitability of their product or service lines is challenging. Nonprofits often struggle identifying all costs associated with their earned income activities. Overhead costs, including marketing and administrative expenses, are particularly troublesome to identify. Time spent by management or back office employees, as well as start-up and development costs, is also difficult to assess. Nonprofits should ensure they’re capturing all the relevant resources being utilized, thus allowing them to accurately assess profitability and make more informed decisions.

 

Prepare for a Culture Shock

For-profit and nonprofit entities exist for fundamentally different reasons. For-profits are focused on maximizing financial returns whereas nonprofits operate in service to their mission. As a result, their organizational cultures are often distinct. Commercial enterprises are often described as more nimble, innovative, and financially disciplined. Nonprofits that attempt to adopt for-profit business strategies must often deal with the accompanying cultural differences. There may be a focus on profitability that didn’t exist in the past. Operational processes may change as programs funded by contributed income are displaced. There may be new faces in the office and different expectations for staff members. These all require nonprofits to appropriately prepare for some level of discomfort and thoughtfully consider the culture they want to promote.

 

Don’t Forget the Mission

The introduction of for-profit business principles into a nonprofit setting can have an effect on the ability to fulfill an organization’s stated mission. There is always the risk that an earned income strategy will distract or put undue financial pressure on nonprofit managers while also diverting costs from core program services. There is also the risk that the new strategy will alienate the constituents that the organization was meant to help. This is especially relevant if the  earned income is generated from indirect customers who aren’t the beneficiaries of the nonprofit’s core services. This all leads to mission dilution. Nonprofits should ensure they are evaluating whether generating earned income is inhibiting their ability to fulfill their mission in an effective and efficient manner.

 

As traditional funding sources become less predictable, it makes sense for nonprofits to explore other revenue-generating options. However, earned income is not for every nonprofit organization. Although these strategies are often touted as a significant source of income for the nonprofit sector, they actually represent a relatively small piece of the pie beyond fee-for-service revenue generated by health care and educational organizations. Not only does a nonprofit have to monetize a product or service while tending to its mission, but it also has to ensure that it is capable of implementing the strategy and mitigating the associated risks. By thoughtfully considering how earned income can affect an organization, nonprofit managers can maximize the potential of their ideas and give them the best possible chance to succeed.