Non Profit Management

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Chapter 12: Earned Income
Strategies

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Earned Income: Introduction
• Earned income -- income from payment for
goods or services that the nonprofit has
provided (in contrast to contributed income)
• Most revenue in the nonprofit sector is earned
income, especially in the education and health
care subsectors
• Most government funds received by nonprofit
organization are earned income
• Medicare and Medicaid
• Scholarship funds

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Terminology
• Two prominent examples of earned income
strategies
• Partnerships with business corporations
• Business ventures undertaken by nonprofits
themselves
• Unsettled terminology
• Social enterprise
• Affirmative business
• Nonprofit business venture
• Earned income ventures
• Community wealth
• Social entrepreneurship

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Reasons for Adopting Earned Income
Strategies
• Push factors
• Decline in government funding for social programs
• Shift toward a voucher approach in government funding
• Use of competitive contracts in government outsourcing
• Increase in the number and needs of nonprofit
organizations
• Pull factors
• Diversifying sources of revenue, thereby gaining protecting
from changes in funding environment
• Using earned income strategies to help advance specific
missions
• Increasing focus and sharpening goals and management
skills throughout the organization
• Increasing visibility via partnerships and promotion

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Partnerships With Business
• True partnership as a relationship that advances the goals of
both the nonprofit organization and the business
• Contrast with corporate philanthropy
• Partnerships are not necessarily earned income strategies
• Most common types of partnerships
• Licensing agreements – permits for-profit company to use
nonprofit’s name or logo in return for a royalty payment
• Sponsorships – corporation pays the nonprofit for use of
sponsor’s name/logo with nonprofit’s products/events
• Cause-related marketing – nonprofit and corporate
identities are combined, including licensing and
sponsorships
• Operational relationships – corporation acts as a supplier,
improves training, offers benefits for employees

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Obstacles to Successful Partnerships
(Sagawa and Segal, 2000)
• Differences in language and communication
• Differences in cultures
• Differences in status
• Differences in world views
• Differences in bottom lines

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Building Successful Partnerships
• Successful partnerships have a logic to them
• Home Depot and KaBOOM
• Reader’s Digest and Reading Is Fundamental
• Strategies for nonprofit organizations (Sagawa
and Segal, 2000)
• Begin with self-understanding
• Seek out partners with comparable values
• Engage in discussion and conduct due
diligence
• Use small-scale tests before expanding the
partnership

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Nonprofit Business Ventures
• Three principal activities
• Services
• Manufacturing
• Distribution or retail
• Examples
• Retail stores operated by Goodwill or the Salvation
Army
• DC Central Kitchen and Fresh Start Catering
• Triangle Residential Options for Substance Abusers
• Caveats
• Earning income from commercial ventures is often no
easier than earning income from donations
• Extremely high failure rate for small businesses

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Creating a Nonprofit Business Venture
• Identifying business opportunities
• Marketable assets
• Market opportunities
• Organizational capacity for entrepreneurial activity
• Conducting a feasibility analysis
• Outward-- size, outlook, competitive factors, ease of entry,
profitability
• Inward -- fit with mission, skills and expertise, material resources,
managing risk
• Creating a business plan
• Detailed, comprehensive document
• Encompasses elements of strategic, marketing, business, and
operational plans
• Internally used as a guide development of the business
• Externally used as a sales document for enlisting donors or
investors

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Elements of a Typical Business Plan
1. Executive summary
2. Description of the business
3. Management, organizational structure, key
personnel
4. Market analysis and marketing plan
5. Description of products and services
6. Operational plan
7. Financial assumptions
8. Detailed financial plan
9. Uncertainties and risks
10.Plan for growth or exit

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Concerns About Earned Income
Strategies
• Limits on public access to nonprofit goods and
services
• Government funding of nonprofit organizations
using earned income strategies
• Balance between public interests and nonprofit
organization's need for revenue
• Limits on transparency and disclosure due to
contractual agreements
• Role of perception and public relations
• Eroding confidence in the nonprofit
• Creating the impression that it no longer needs
other sources of support

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Thinking Critically About Earned Income
Strategies
• Two opposing perspectives
• Nonprofits should consider only ventures that
are aligned with their missions
• Nonprofits should look almost exclusively at
whether a business venture is financially
profitable
• Framework evaluating opportunities based on
profitability and relationship with mission
(Young, 2006)

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