Should Nonprofits Seek Profits

Abstract

Motivated to reduce reliance on fund-raising,many nonprofits are engaged in earned-income (profit making) ventures.Nonprofits may want to appear entrepreneurial and innovative or becomefinancially independent. However, most earned-income ventures are notprofitable. The authors offer an assessment of nonprofit earned-incomeventures. Among their findings: (1) Most such ventures account for only a small shareof funding and most lose money. (2) Organizations are overly optimistic aboutthe ventures' potential, profits are overstated, and indirect costs are oftennot accounted for (thus distorting true financial accounting). (3) Commercialventures can distract (or even subvert) nonprofits' social missions, thuswasting resources. Analysis of other studies of the profitability of earned-income venturesfound that many areunreliable because the samples are self-selected orthe definition of profitability does not account for start-up costs. ABridgespan Group study ofa random sample of 41 nonprofits that hadreceived philanthropic support for an earned-income venture in 2000 or 2001found that 71 percent of the ventures were unprofitable; of the 24 percent thatreported being profitable, half did not fully account for indirect costs. The authors suggest that nonprofits must ask the critical question:Does this venture contribute to our organization's core mission? Ifso, the venture could be attractive even if never breaking even. The analysisoffers a set of eight questions to help nonprofits impose rigorous disciplineon the evaluation of earned-income opportunities; such an evaluation will keepthem focused on their fundamental principles and avoid mission-driftand wasted time and money.(TNM)

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