On Asset Building For Nonprofits
by 2009 Fellow Rashan Jibowu
Despite my short tenure as a nonprofit professional, I have significantly increased my appreciation for the great work that nonprofit organizations perform every day. But, I also feel compelled to ask: Are nonprofit business models generally sustainable? Many people correctly perceive nonprofit business models as primarily raising money from donors, foundations, government and other sources and spending that money consistent with their mission. Scrolling through a Form 990, though, reveals that nonprofit organizations utilize a variety of methods to generate revenue. In addition to the more traditional grant seeking process, some nonprofits focus on contracted and fee-for-service work. Others, especially large, endowed organizations with substantial assets, rely on interest and dividend income. Still others focus on throwing events, though I suspect these events tend to serve primarily as a marketing opportunity rather than a profit center. Nevertheless, donations, especially from individuals, continue to dominate the funding environment for many nonprofit organizations and, as a result, the question remains: What is the competitive advantage of habitually asking for donations versus other revenue generation techniques? Furthermore, how can nonprofits utilize their various revenue generation models to increase their own capacity?
The self-evolving concept of a social enterprise not only sheds light on new approaches to address social problems, but also provides new ideas for nonprofits to sustainably achieve their mission. I do not suggest profit maximization is fundamentally a good thing in and of itself. On the contrary, many will argue society’s need for nonprofit organizations stems from the historic and current abuses and inefficiencies of profit maximization. Instead, part of the allure of social enterprise is that it begins to address whether the traditional nonprofit business model is sustainable. For example, it is counter-intuitive to expect any organization, for profit, nonprofit, or otherwise, to operate without covering reasonable costs of operation. While contracted and fee-for-service revenue models generally offer a level of revenue stream protection, donations, unfortunately, tend to be much more sensitive to economic changes. In addition, any organization’s donor base may change as a result of a variety of reasons wholly unrelated to the economy. For example, a particular donor’s philanthropic priorities may shift or her financial situation may change. Diversifying one’s donor base, unfortunately, does not fully solve this problem. The relative lack of stability in a donation-driven revenue model could prove catastrophic and the relatively short lead time further exacerbates this problem.
Other revenue models, of course, are not without their own similar challenges, and to be fair, it may be the case that some nonprofit causes are best supported through donation revenue. This, though, does not change the fact that the unique and most traditional nonprofit business model may actually limit an organization’s effectiveness. On the other hand, however, the donation-driven model reflects a core sense of civic engagement through donor relationships. While the money is important, of at least equal importance is the participation and non-financial support of donors. While it is certainly possible to develop a support base where people donate time and services rather than money, the lack of financial donors may weaken an organization’s ability to secure the additional support that comes along with the money. Nevertheless, our sector may want to consider revenue models that reduce risk to the overall organization and while encouraging long term staying power to continue to deliver necessary services to communities.
Towards the same end, we may want to consider asset building strategies for nonprofit organizations – the benefits of which should be obvious. Sizeable asset bases help ensure an organization’s ability to endure challenging economic times, increase its staying power and longer term systemic community impact, and provide the ability to attract and retain high quality talent through competitive compensation and development opportunities. Clearly, we should encourage nonprofit organizations, especially smaller ones, to build asset bases. Imagine all of the time and opportunity lost when an executive director at a small nonprofit spends 15-50% or more of his day fundraising rather than managing the organization, directing staff and serving communities. Imagine the missed opportunities when a donor has to pull out or might commit significantly less in the short term even though the social problems being addressed are fundamentally long term. Creating and building income generating assets such as endowments and other mission-related assets could be positive steps toward this goal.
One consequence may be a significant shift in the balance of power away from funders and toward the would-be recipient organizations. Furthermore, income-generating or asset-based business models may not be appropriate for all nonprofit organizations. If there is genuine interest in seeing nonprofit organizations prevail and maintain sustained impact in the communities in which they serve, we as a sector ought to start thinking about ways in which our collective efforts can build assets at the organizational level. Asset building should be conceived and perceived as a strategy for increasing the overall effectiveness of nonprofit organizations, not as a means toward organizational enrichment. With this new financial independence comes significant responsibility to appropriately manage and steward community assets. As a result, another challenge is to incent proper management and stewardship and ensure proper controls.
The nonprofit sector is no stranger to innovation and as a result I’m confident we can deal with these challenges. So, let’s encourage nonprofit organizations to build up asset bases for their communities. Let’s begin a national conversation to explore bold strategies that maximize the effectiveness of nonprofit organizations. Let’s explore methods to balance societal needs and regulatory guidelines of investing capital into communities with the need to build organizational assets that ensure long term sustainability. And let’s prepare for a resultant shift in donor and foundation relationships with nonprofit organizations that might result from more potentially financially independent nonprofit organizations. With all due respect, asking for money and scrambling for operational support is simply not an effective long term business model, regardless of tax status.