Diane Meyerhoff, (author/editor of this most recent version)
Greg Newton (I recall that Greg developed the “unbundling” exercise about 15 years ago!)
They have all done excellent work on this with local agencies, and on earlier versions of this workbook, and on this workbook.
Please send corrections, comments or content for future editions to:
Center for Community Futures
PO Box 5309
Berkeley, CA 94705
E-mail: email@example.com Web page: www.cencomfut.com Profit Making and Social Entrepreneurship Tool Kit Table of Contents
A. WHAT AND WHY of Profitmaking and Social Enterprise
Highlights of This Section...
What is profit-making?
How did it start?
Where are we now?
What is Social Enterprise?
What are the future challenges?
Questions, questions, questions.
Fears and Realities
1. What Is Profit Making?
“Profit" is defined as "the monetary surplus left to a producer or employer after deducting expenditures." (The Random House College Dictionary, 1973.) "Profit-making" in nonprofit organizations has generally involved activities or enterprises aimed at generating income that will help pay for ongoing operations or that extend the mission in new ways, e.g. providing full time employment for program participants. Profit-making is a way of generating unrestricted income, free from the "strings" which accompany government, corporation or foundation funding. Earned income is also called profit by some people.
"Fund-raising" is the more traditional method used by nonprofits to obtain funds. Fund-raising generally means an organization seeks gifts or donations or conducts special events to support its activities. These gifts/donations may be in the form of grants, bequests or individual donations. The amount, length of support and approved uses of funds are usually determined by the donor, rather than the recipient.
"Program Income" is the money a nonprofit earns when Federal, or sometimes state, grant money has been used to generate it. For federal programs, program income is defined as:
“...gross income earned by a (grant) recipient from activities part or all of the cost of which is ...borne as a direct cost by a grant... It includes but is not limited to such income in the form of fees for services performed during the grant."
Since program income is derived from grant funds, the federal funding source has the authority to decide how it can be used. The three major options are:
1. Funding sources requests a refund of the money earned. (The Treasury choice)
2. The program income is subtracted from the regular grant. (The OMB preference)
3. The money collected can be used by the nonprofit for an approved program expansion. (Fortunately, most Federal funding agencies usually do this.)
This publication focuses on the broad range of profit-making activity, but not including Fund-raising. We discuss business or revenue-generating activities, not grants; donations; or special events. The emphasis is on helping you to identify products or services which can generate income. It is unlikely that profit-making activities will totally eliminate the need for grant funds for most agencies; however, profit-making can be a viable source of supplemental funds, or can extend your mission. One subset of profit making is called social enterprise.
Social entrepreneurship -- for-profit enterprises operated by nonprofits -- enables them to continue or expand their work. Running a business that employs program participants builds a fresh new image for some nonprofits. We define the types of social enterprise for use in this publication on page 1-5.
A nonprofit can not distribute its net earnings as a dividend to individuals who have control over it (i.e., no benefits may inure -- or go -- to officers, directors, trustees)
A nonprofit organization can earn a profit. (e.g. hospitals, private schools, etc.)
For those nonprofits that also have a tax-exemption from the IRS, if the profit comes from activity that is related to their tax-exempt purpose then they do not have to pay taxes on it. If the profit comes from activity that is unrelated to their tax exempt purpose, then they will pay taxes at regular corporate rates. (This is not so bad a problem to have!) The test is made on the type of activity that generates the profit, not on the way in which the profit is used. More on this later.
2. Why Profitmaking? Reductions in government funds, fierce competition for grants and bequests, and relatively small increases private sector contributions are prompting some nonprofits to look for other sources of funds. For others, a desire to go beyond traditional services to provide new opportunities for employment is a prime motivator.
Dramatic changes have affected nonprofits over the past five years; these changes make other income sources more important:
An increased number of nonprofit organizations are competitors in a shrinking grant environment.
Government policies have shifted more responsibility for responding to poverty and social problems to the nonprofit sector while reducing monetary support to that sector.
New incentives are needed to keep quality staff.
The economy will never provide enough good jobs. Nonprofits are seeking to provide permanent employment for program participants
3. How Did it All Start?
The date of the first church bazaar or bake sale isn't recorded. Profit-making began at the populist, or grassroots level, when the first church or community group discovered the collection plate just did not contain enough. And, it is an idea closely tied to an enterprising spirit. So what seems to be a contradiction -- profit-making by nonprofits -- isn't such a contradiction: It grew out of social concerns and causes.
Volunteers were one of the most important assets of these early ventures. Many were women with enterprises reflecting women's skills and interests at the time -- sale of baked goods, crafts, and cookbooks. As time passed and the idea evolved, those enterprises evolved into business ventures we recognize today -- hospital coffee shops, thrift stores, bookstores, museum gift shops or restaurants, and Girl-Scout cookies.
Grants are finite, cyclical and dependency producing. You'll always be competing for them with life and death organizations like hospitals. Inevitably a losing game. The winning game is generating much of your own income.
Richard Stekel, Director, Denver Children's Museum
Incorporation of a training program or work experience may help your program participants
Need for financial sophistication
Energy may diverted to the for-profit a the expense of the nonprofit
Only 10-15% of nonprofits have solid prospects. That group would include... arts and educational institutions which have money-making experience and a public receptive to the idea. -- Edward Skloot, New York Consultant
On the Other Hand....
If survival's at stake, any organization should at least confront the possibility, however slim, of earning some income. The question is: how can the organization realize whatever potential it has? -- S. Loren Cole, California Consultant
4. Where Are We Now?
In the 1960's, the nonprofit sector exploded with tens of thousands of new agencies and hundreds of new programs. The Great Society programs reached past traditional public agencies to finance social movements and community based organizations. New structures were created to address complex social problems. Community Action Agencies (CAA’s) and Community Development Corporations (CDC’s) were designed to encourage business and community development in economically disadvantaged areas. CDCs helped neighborhood entrepreneurs operate business enterprises and build, rehabilitate, and manage housing. The long experience of the CDCs contains many of the issues, successes, and problems that a nonprofit profit-making enterprise will encounter.
Other nonprofit groups joined the profit-making movement out of necessity. Drug and alcohol rehabilitation centers and half-way houses for ex-convicts traditionally have difficulty attracting funds and finding permanent employment for program participants. Instead of relying on totally philanthropy or government support, these groups capitalized on one asset: an available labor pool. Sheltered workshops were created to meet the therapeutic and rehabilitative needs of both their clientele and the market area.
Expansion, professionalism and new possibilities typified non-profit enterprise during the 1970's. Universities began using empty space for summer conferences and seminars -- for a fee. Museums began selling reproductions of jewelry and carvings, stationery and bath towels. Zoos studied traffic patterns and began selling hot dogs, balloons, and animal food in spots with heavy traffic flow.
The expansion of the 70's was checked by federal budget ceilings in 1978 and cuts in 1981. The Urban Institute estimated that federal budget cuts cost the nonprofit sector $25.5 billion through 1984. Local human service agencies experienced cuts of 15% to 25% in most programs.
The 1990's were characterized by “cause-related marketing” – where nonprofits teamed up with for profit businesses for mutual benefit. The results of these partnerships run the gamut from the successful collaboration between Share Our Strength and an omelet pan manufacturer to the disastrous public relations debacle for the American Medical Association and Sunbeam products.
Defining Social Entrepreneurship
Some describe the overall purpose of nonprofit entrepreneurship as building “community wealth” – generating resources through profitable enterprises to promote social change and build assets for the community as a whole. Others take a more narrow focus and look at the benefits to the organization and the people directly involved.
Although these business enterprises take many forms, for purposes of this publication we will group them into the following three categories: social entrepreneurship, direct entrepreneurship, and cause-related marketing. 1. Social Entrepreneurship is mission related -- using ventures to accomplish or extend the mission of the agency. It provides jobs, competitive wages, career opportunity, and ownership for people who are disadvantaged, whether it be physically, mentally, economically, or educationally. Undertaking social entrepreneurship is the transformation of one's agency or a program into a place where there is a business venture with a social mission. Usually the business is related to its tax exempt purpose. This may be a single venture, or a “market aggregation” or “access to markets” project. Some agencies create a market for the products or services produced by program participants -- like a crafts catalog, a consignment shop, a carts-and-kiosks venture, a flea market, or farmers’ market.
Examples of social enterprises that are single businesses include:
A restaurant, run by a nonprofit, to assist formerly homeless and/or substance abusing men to learn the restaurant trade. (Delancey Street, San Francisco)
A Community Action Agency in Seattle sells holiday gift baskets, with products made by their clients, via direct marketing. They also run a for-profit thrift shop (Lower Columbia Community Action Council, Longview, WA)
A youth agency in San Francisco operates a Ben & Jerry's franchise to teach youth about the service industry. (Juma Enterprises)
A CAA runs nine (9) thrift shops. (Parkersburg, WV)
Examples of market aggregation ventures include:
Appalachia By Design, a knitting cooperative, assists residents to find markets for their hand-knit sweaters. They offer training, certification, and marketing assistance. (West Virginia)
A Community Action Agency in Seattle sells holiday gift baskets, with products made by their clients, via direct marketing. (Lower Columbia Community Action Council, Longview, WA)
An agency in Alaska sells native crafts through a high end mail order catalog. (Rural Alaska Community Action Program, Anchorage)
2. Direct entrepreneurship includes businesses created by nonprofits, that are designed to create profit for the nonprofit, even through it is not directly related to the charitable purpose of the organization. Examples of direct entrepreneurship include:
A museum runs a gift store and a cafeteria.
A museum, aquarium, arboretum, library or historical building offer their facility for weddings and parties.
A nonprofit owns its building and rents out office space to other organizations or to businesses.
Local governments run Off Track Betting, hotels, restaurants, parking garages, and radio stations.
The Girl Scouts sell cookies to raise money for club projects.
A university runs a materials testing lab, or a travel agency or an appliance store.
A nonprofit sells its mailing list.
3. Cause-related Marketing involves the agreement between a corporation and a nonprofit that benefits both parties. The three types of cause-related marketing are described briefly below.
1. Transaction-based promotions. The corporation donates specific cash or product in direct proportion to sales revenues. An example is the American Express Charge Against Hunger campaign;
2. Joint issue promotions. A corporation and a nonprofit take on a social problem through education and promotion. Money may or may not change hands. An example is “Hand in Hand,” a program to promote breast health, sponsored by Hanes Hosiery and a number of nonprofits. It included magazine advertising, in-store promotions by Hanes, and free educational materials; and
3. Licensing. A corporation uses a nonprofit’s name and logo in return for a fee or percentage of revenues. An example is credit cards with a college logo.
The Challenge of the New Millennium
More and more nonprofit staff and board members are looking at themselves from a different perspective -- as entrepreneurs. Many are using sound business techniques to sell products and services related to their social mission. As they begin to think like entrepreneurs, new income producing possibilities are emerging. The challenge is being pursued through increasingly creative ventures and partnerships:
Many Community Action Agencies, building upon 20 years of experience with Weatherization Programs, have started for-profit business subsidiaries to assist homeowners who were not eligible fore the free services to assess and improve the weatherization of their homes. Some agencies contract with utilities, mortgage lenders, and real estate agents to rate the energy efficiency of homes.
The Los Angeles Coroner’s Office opened a store that sells a variety of logo-imprinted items - body bag luggage, crime scene tape, body outline note pads, etc.
The Women’s Business Center opened a coffee shop, called Coffee with a Conscience, in the Milwaukee Public Library, after the privately-owned shop went out of business. They use the shop as a business lab for new entrepreneurs, a marketplace for local bakery items, and a promoter of ecologically sound coffee growing practices.
In Middlebury, Vermont, a consignment shop named Neat Repeats raises money from the store to support many local nonprofits. Local nonprofits apply to Neat Repeats for grants. In 8 ½ years in business, the shop has donated $500,000 to area nonprofits.
The Intervale Foundation’s fledgling compost project began accepting yard and food waste to make high quality compost. They now sell their compost by the bag and truckload throughout Chittenden County, Vermont.
The Burlington Community Land Trust sponsored a “child’s vision of home” project, inviting area elementary school students to draw their vision for secure and happy homes. The drawings were made into greeting cards and underwritten by the Bank of Vermont. All proceeds from the cards benefit the Land Trust.
Profit making is not easy. The agency has to run the nonprofit side of the agency, the new business, and it has to run the relationship between the two.
Questions, Issues, and Decisions Where do we start...?
What do you need to do?
When do we show a profit?
What are the legal issues?
How is the Board involved?
We'll lose our tax exempt status!
But what about our mission?
Hey! I’ve got an idea!
Wait a minute... I’ve got a better idea...
Listen to this we can use... Risk can be exhilarating for some but can cause uncertainty and anxiety for others. It is even more difficult if a nonprofit has become dependent on public sector and private contributions. Such an organization may be too accustomed to serving the requirements of its funding sources. Or, it has developed programs backed by inadequate funds that never seem to fill the demand of its constituents. Or, it has become too socially specialized. It may seem the complexities involved are overwhelming and starting a profit-making business is a high risk, but it can be done – and that is what this book is about.
This book provides you with the decision-making and information resources you can use to start a profit-making enterprise. It is meant to be written in and used. The exercises, work sheets, and resource lists are designed for group decision-making and involvement. Keeping a record of your thoughts is useful... write them down. Understanding what is involved is a start toward selecting and running a good business. Making the decisions and facing the issues takes initiative, planning, determination and intuition. All are part of the entrepreneurial venture.
Don’t be discouraged about the time necessary to undertake entrepreneurship. The planning and discussions you have early in the decision-making process may be beneficial to your fledgling business venture – and avoid problems in the relationship between the nonprofit and the venture later on.
Fears and Realities
1. Profit-making is an inappropriate activity for a non-profit organization: “We are a human service agency!”
1. What may have been inappropriate in the past is rapidly changing. Many non-profits have been doing this for years, e.g., Girl Scouts and others.
2. "We may lose money!"
Yes, you may lose money, but you may also make money.
3. “The community wouldn’t like it.”
3. There is a mixed public reaction to this strategy: Some think that we “should act like a business” and appreciate the trend of self-reliance. Some don’t think it’s appropriate.
4. “It’s illegal for us to make a profit – we’re a non-profit.”
4. It is legal. All ventures can be operated and a profit made. A lawyer can help explain why.
5. "We can't do it... we don’t know how to operate a business.”
5. Many are doing it and making a profit. You can get the expertise you need.
6. “Business ventures will distract from our mission: providing services.”
6. If you make money, the profits can be used to enhance the resources to provide programs that meet the mission.
7. “Our funding sources won’t like it.”
7. Some funding sources are encouraging profit-making activities. It is your agency and you have to make your own choices.