In the U.S., over 1 million organizations qualified for 501(c)(3) status in 2009, yet charitable donations declined: $315.08 billion in 2008 vs. $303.75 billion in 2009. As competition for resources increases, it’s difficult for nonprofits to grow or even exist.
There are huge markets where people have needs — for food, shelter, education and more — but can’t afford to pay money out of their own pockets to have their needs met.
In the United States, the government created the 501 (c) (3) nonprofit corporation to help address this situation. Technically speaking, a 501(c)(3) is a tax-exempt legal structure that can receive charitable donations from individuals, businesses, government agencies, and philanthropic foundations. Examples of well-known not-for-profits include: the Boys and Girls Clubs, the YMCA and the Sierra Club. People who donate money to these charitable organizations benefit by deducting the contributions from their taxable income.
In the United States, over one million organizations qualified for 501(c)(3) status in 2009 compared to 600,000 in 1993. Charitable donations have declined: in 2008, $315.08 billion were invested in the not-for-profit sector, compared to $303.75 billion in 2009. Competition for resources has increased, making it more difficult for nonprofits to grow or even exist.
- Like any business, a not-for-profit needs to generate revenue to cover its expenses. It needs to identify a target market and figure out how it will deliver its products and services to that market. Some key differences and considerations exist, however, and you should be aware of them before you choose this legal structure:
- No one can own a not-for-profit organization: A nonprofit cannot be bought and sold like for-profit businesses. If you decided to dissolve such an organization, you would not be able to sell it for your own financial gain. Nor can you issue stock in the corporation to raise money for the organization. Employees of not-for-profits typically earn money by drawing salary as a fixed cost of the organization. Not-for-profits are great vehicles for improving society; they are less effective as a tools for creating wealth and sharing that wealth with others.
- Not-for-profits are mission driven: Before you can go into business as a not-for-profit, you will need to be crystal clear about your organization’s mission. What problem(s) are you trying to solve? Is there a market of donors who will contribute money to your cause?
- Not-for-profits have a different perspective on their EOU: Like any business, not-for-profit organizations need to conduct an Economics of One Unit (EOU) analysis. Your EOU will reveal how the business defines a typical “unit of sale,” the amount you plan to charge per unit, and how much it costs the business to deliver this unit to an average customer. For-profit businesses pay close attention to their gross profit per unit because their dollar amount sheds light on the potential to become profitable. Not-for-profit organizations must also assess their EOU, but here the focus is a bit different since not-for-profits do not exist to generate a financial gain. The difference between the organization’s cost per unit and its selling price per unit should be modest. Remember that not-for-profits receive charitable contributions from donors who want to make sure that their money is being invested directly into the organization’s programs and services — not their savings accounts. Not-for-profits must strike a delicate balance between charging donors “at cost” and ensuring that they have enough money to pay their overhead and stay afloat. If your donors and the general public suspect that your organization is mismanaging its funds, your reputation will be badly damaged. Many not-for-profits have gone out of business for this reason.
- Analyze Your Social Return on Investment (SROI): With a for-profit business, the return on investment is calculated by looking at the corporation’s financial returns. Not-for-profit entrepreneurs need to think about their ROI a little bit differently. Not-for-profits don’t exist to make money, so the ultimate measure of success won’t be financial in nature. Your SROI will be based upon how much it costs your organization to provide its services. This must be analyzed in relationship to the value of the level of change that was brought about as a result of this investment.
- Define Your Unit of Change: As a not-for-profit entrepreneur you will need to set goals regarding the changes you intend to cause in society. How many homeless people will you feed? How many students will graduate as a result of your dropout prevention program? These goals must tie back to your costs and your EOU. What constitutes a unit of service? Is it based on one person, one classroom, or one square mile of the rainforest? How much does it cost you to provide services on a unit-by-unit basis? Given these costs, how many units of change did your organization produce? How can you prove that your not-for-profit caused these changes?
- You Can Still Be Your Own Boss — But with a Twist: Even though the not-for-profit entrepreneurs do not own their own organizations, they still get to be their own bosses. They also benefit from the satisfaction of having started something from scratch that improves society in unique and innovative ways. However, unlike a business owner who runs a privately held company, a not-for-profit entrepreneur must answer to its Board of Directors. This scenario mirrors what happens when a private sector decides to “go public” and sells shares to the public. Here, the company must establish a Corporate Board that will oversee the interests of the company’s shareholders. Similarly, a not-for-profit organization’s Board of Directors manages the entrepreneurs and oversees the organization’s finances and operations. All nonprofits are, in a sense, “publicly held” because they cannot, by definition, be privately owned.
- Analyze Your Financing Strategy: Not-for-profit corporations can tap into a large revenue stream that other business structures cannot access. Not-for-profits generate revenue through grants, gifts and earned income.
Here is a format for a nonprofit strategic and tactical plan you should follow:
- What is the name of your nonprofit organization?
- What problem(s) are you trying to solve?
- Describe your organization’s mission.
- Describe the programs and services you plan to create.
- How will your organization achieve its mission?
- What is the “unit of change” (per person, animal, house, etc.)?
- How will you measure these changes?
- Who are your competitors?
- How much will it cost you to deliver a unit of service?
- Which foundations support your organization’s mission? What are their funding guidelines? Make a list of five to ten possible grants for which you could apply.
- Which individuals will you approach to raise money for your enterprise? How much will you request? Make a list of five to ten prospective donors.
- Will you have any sources of earned income? What products or services do you plan to sell directly to the public to generate income? List the possible sources of earned income and how much money you expect from each source.