Nonprofit organizations (NPOs) are critical in addressing societal challenges and driving positive, community-centric change. However, a common misunderstanding persists that NPOs should operate without generating “profit.” This misunderstanding that it is OK to lose money or just break even can derail these organizations’ long-term sustainability and impact. Hot take: Nonprofit financial sustainability. Nonprofits must urgently adopt a more strategic and business-minded approach to their financial management, most especially their bottom line, to ensure they can continue fulfilling their missions effectively.
The Myth of “No Profit”
The general public mistakenly assumes that nonprofits should not generate any surplus revenue. This understanding is understandable given the “nonprofit” misnomer; however, this perspective fails to recognize the critical nature of financial stability in sustaining an organization’s operations and impact. Nonprofits need to cover their operational costs (salaries, utilities, programs, services, etc.), invest in growth (research and development, capacity building, professional development), and build reserves to weather unexpected challenges . Unexpected challenges can include increased service demand, inflation, or a global pandemic.
Charging for Services: A Path to Sustainability
One key strategy for nonprofit sustainability is charging, or partially charging, appropriate fees for services. This approach has several benefits:
- Ensuring Nonprofit Financial Sustainability: By generating revenue through service fees, nonprofits can reduce reliance on unpredictable funding sources (such as private foundations and corporations) and create a more stable and predictable financial foundation .
- Valuing Organizational Offerings: Charging for services reinforces the qualitative and quantitative value of a nonprofit’s work, both internally and externally. It communicates that the organization’s offerings are worthwhile, impactful, and deserving of support.
- Supporting Long-Term Impact: Sustainable earned revenue from service fees allows nonprofits to focus on their mission and long-term goals rather than constantly struggling to secure short-term funding. So many NPOs are so starved for financial support that in a state of desperation, they apply for available grants, which leads to them launching initiatives unrelated to their core missions.
True Cost Recovery
Nonprofits should also advocate for funders to cover the true cost of delivering services. This includes not only direct program expenses but also overhead costs essential for organizational effectiveness. By educating funders about the real costs of running impactful programs, including overhead, nonprofits can secure more comprehensive and sustained support for their work .
Balancing Mission and Financial Sustainability
It’s important to note that charging for services does not mean abandoning the nonprofit’s mission or excluding those from marginalized communities who often cannot afford to pay. Instead, it involves balancing financial sustainability and accessibility. Nonprofits can consider sliding scale fees, scholarships, or cross-subsidization models to ensure their services remain accessible while still generating necessary revenue .
The Role of Entrepreneurial Orientation
Research has shown that adopting an “entrepreneurial orientation” can assist nonprofit financial sustainability by helping NPOs overcome resource constraints and enhance their sustainability through earned revenue. This approach involves being proactive, innovative, and willing to take calculated risks in pursuit of the organization’s mission .
Bringing it Home
NPOs should not fear the public perception of generating surplus revenue or charging for their services. In fact, boards should encourage, if not require, the annual gain of surplus funds. By valuing their offerings and seeking appropriate service compensation, nonprofits can build a sturdy foundation for long-term sustainability and increased community impact. Once up and running, this “entrepreneurial orientation” enables organizations to focus on their missions, invest in growth, and weather financial uncertainties.
We must all challenge the notion that nonprofits should operate without profit. By doing so, we can foster a more resilient a sector capable of addressing society’s most pressing challenges.
Remember nonprofit ≠ no profit. When this becomes our guiding principle, nonprofit financial sustainability becomes achievable.
References
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