One thing a for-profit and non-profit business have in common, is that they both must make money to sustain in the market. Although, it is not important for non-profit organizations to make profits, it is necessary for them to pay the bills and salaries to employees.
A true non-profit company is formed to achieve charitable, scientific, educational or literary purpose or for activities such as public safety testing, fostering sports competitions and saving animals and children from cruelty.
Although, these organizations do not acquire profit in the traditional sense, they need funds to provide services and daily operations.
Before getting into How Non-Profit Organizations Make Money, let’s check out the Difference between For-Profit and Non-Profit Companies for more clarity.
|Differences||For-Profit Company||Non-Profit Company|
|Purpose||Generates revenue for private interest and benefits of the owner, business or its shareholders||Formed by ordinary citizens to achieve charitable, developmental and betterment of society purpose.|
|Audience||Consumers who buy products and services.||Consumers, Volunteers, Donors, Corporate Sponsors or General Public|
|Funding||Loans, Investors, Revenue earned through Sales||Donations, Sponsorships, Grants & Crowdfunding|
|Workforce||Hiring of paid employees or interns||Relies mainly on volunteer staff|
A non-profit company’s main goal is to benefit the public with no focus on gain of any individual or group of people.
According to 503©(3), a public charity must derive a percentage of it’s income from the general public in ways such as fundraising campaigns, bequests of deceased supporters, grants, or even by holding events such as races, galas and marathons.
Earned Income in Non-Profit Business
Although, the aim is not to earn profit, but this does not mean that non-profit organizations should not generate revenue through sales. Most of the charitable NPO’s receive income from sale of various products and services.
The Girl Scouts of USA is still an evergreen example of a well-established charity selling cookies in order to raise funds. Other products and services include sale of tickets for performances, selling merchandise or running a thrift shop.
The items on sale do not have to be too fancy, but should be sustainable and interesting enough for comeback value. One advantage that these NPO’s have is that they are eligible for discounts from product providers, which helps in keeping their costs down, increasing the revenue of the business.
Activities Related to Mission
Non-profits are essentially, businesses with a social mission. Even though they do not earn money the same way a for-profit business does, their business strategy still includes working for money. They make money by leveraging activities related to the mission.
For example, a non-profit amusement park might set up a gift shop in their premises or a dance academy selling tickets to performances in order to raise funds for lessons for aspiring dancers.
As long as the activity is related to charitable purpose, selling a product can offset program costs and bring in higher revenue stream. They sell products such as books, apparel, tickets and promotional items usually.
Unrelated Activities to Mission
Sometimes, NPO’s make revenue through ways which are not for charitable purpose. For such transactions, an activity is unrelated and subject to income tax if these 3 requirements are met:
- It is a trade or a business
- It is recurring
- It is unrelated to the organization’s purpose
Even though, non-profits are allowed to run unrelated activities without losing their non-profit status, they still have to pay taxes called UBIT. In order to comply to the taxation policies of a non-profit, it should earn within the limits from unrelated activities else, it might lose its tax-exempt status.
Philanthropic Support to Charities
There are several different ways of receiving charitable support from philanthropic people or institutions. In order to support their mission, non-profit organizations accept this income pie which fulfills their public support obligation.
Most of their revenue is through charities and donations. Do you wonder how these non-profit businesses cover their operational costs? They are only able to achieve their missions through such donations. Such donations make up to 68% of all individual charity in 2018.
In order to build a rapport between the individual and the organization, several interactive measures are taken. One of the ways such interactions can be enhanced is through a healthy volunteer program. Volunteers who have a passion for the mission tend to stick around for a long time, contributing the most to the mission.
To make sure of generating revenue from these individual donors, NPO’s ask them to do
- One-time donations
- Recurring donations
- Online donations
- Attending events
- Planned giving
Some donors may have to bear tax deduction on their donations.
Grants from Foundations, Corporations and the Government
Another such way NPO’s raise funds is through grants which come from foundations, corporations, and state and federal governments. They usually come on board for limited time and these grants fund a specific project involving lengthy application process, however, they can prove invaluable for non-profits.
Even though grants are not the primary source of revenue for charities, but they do fill the needs such as funding a specific project or building capacity of the business.
Corporate’s usually partner with non-profit organizations for a one-time relationship wherein the company donates only for a specific event or program, for cause related marketing, sponsorships of events, matching employee donations and creation of employee volunteer program.
It is a great match for non-profits because such grants are available in abundance providing large sums of funding.
Many companies believe in giving back to the society by setting up a separate budget for society or community missions and social causes.
While small and local businesses may support small causes such as a religious organization or a local youth sports team, large corporations may support NPO’s interests which align with their company’s interests.
For example, an education-based company might choose to donate to an organization which teaches underprivileged children for free. For such donations, corporations ask the NPO’s to mention them and place their marketing materials at an event to increase their brand awareness and attract new customers.
So now you know, the term non-profit does not mean no income, rather such organizations require money for their daily activities to grow and continue to serve the society and the missions.
Seeking multiple income mixes, NPO’s make money in several ways but put most of it back into the organization to run its societal purpose. Without this continuous revenue stream, they wouldn’t be able to make the same impact as they do.