In their article,
“Should Nonprofits Seek Profits,” Foster and Bradach argue that
the trend in nonprofits engaging in business ventures to provide
funding for their mission related programming is a counterproductive
measure that often fails to deliver results and, in many cases,
undermines the mission related work of the nonprofit. My position is
in agreement and the purpose of this paper is to bolster support for
this position by making the following three arguments: Resources
spent on generating earned income are better spent elsewhere; A focus
on earned income takes away from the mission of the nonprofit, and;
Earned-income activity is often derived out of a misplaced sense of
morality, not smart management.
First, it is
important to remember that non profits are already funded by the
profits of other entities. Whether through individual donations, or
public and private grants, wealth was amassed, and a portion of that
wealth is now being redistributed back into the nonprofit sector.
Nonprofit organizations that have traditionally had earned revenue
streams, such as healthcare, education, and the arts operate the way
they do because they sell a product. However, the actual
cost of producing what they are selling is too expensive for much of
population they wish to serve, meaning they need to prop up their
operations with contributed revenue in order to continue offering
their product. Therefore, the cost of attaining their earned revenue
is a program expense. However, when an organization does not have a
ready made product, they have to find an unrelated or tangentially
related way to earn the revenue.
When you compare the amount of effort and savvy needed to create a profit generating enterprise versus simply asking an existing enterprise to share a portion of their profit, it is clear that the rate of return on just asking is better. The best practice for nonprofits is that no more than 30% of their funds be spent on fundraising and administration. So for a nonprofit that relies totally on contributed revenue, their profit margin is essentially 70% or higher. Compare this to many earned revenue schemes. According to Business Insider, the industries with the highest profit margins in 2012 were Consumer Food, Beverage and Tobacco, and Software at 29% and 26% respectively. This is at best an inverse of acceptable practices for nonprofits. It is clear that seeking contributed income is a better use of resources than focusing on earned reveneue.
Second, creating a business venture takes away from the mission of the nonprofit. Unless one is simply increasing fees for their existing programming, increasing earned revenue means new activity. If a nonprofit is already offering the programming that fulfills their mission, it follows that any new activity will be only tangentially related to that activity. If it is primarily for the purpose of generating funds, then it is very clearly not only not part of the mission work of the nonprofit, but not even a nonprofit undertaking. As such, nonprofits should only engaged in earned revenue work that is directly related to carrying out their mission, such as job-training, or fee-for-services, or they should establish a separate business entity whose purpose is to generate income for the nonprofit but to whom the nonprofit is not accountable.
Finally, the movement for nonprofits to focus on earned revenue is based on the notion that everyone should be self-sufficient and that it is not our job as society to care for one another. This is categorically counter to the purpose of a nonprofit sector. The primary underpinning of the nonprofit sector is there are functions that benefit society which are not supported by market forces. Therefore, it is incumbent upon the population to use the excess that the market has generated to support these functions. That's called caring for each other. By each contributing a bit of our excess back into society, society as a whole benefits. Ensuring societal benefit, rather than shareholder benefit, is what separates the nonprofit sector from the for-profit sector. Regardless of one's opinions on the need to be self-sufficient as an individual, we must remember that such morality does not apply to nonprofits.
In conclusion, it is clear that Foster and Bradach have the right of it. For nonprofits to expend their finite resources on generating earned revenue, is inefficient, irrelevant to their mission, and based in a morality that is invalid to the work of improving society, the whole point of having a nonprofit sector in the first place.
