Making Sense of Earned Income Opportunities

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Photos courtesy of Urban Ventures

Urban Ventures in Minneapolis created earned revenue programs — a coffee roasting business, farm, market and beekeeping operations — to broaden the nonprofit's income mix and support its mission of community development in Minneapolis. CityKid Java provides coffee services to individual and corporate customers, while employing teens.

When Urban Ventures launched CityKid Java nearly 15 years ago in Minneapolis, the community development nonprofit was just hoping to generate some extra revenue outside the common mix of individual donations, corporate giving and foundation grants.

They got much more than they bargained for from the coffee roasting enterprise: a built-in marketing arm to connect with new donors, a way for young people to explore the world outside their neighborhoods, and, over time, a source of jobs for the communities they work with every day.

“It’s been a cool surprise,” said Mark-Peter Lundquist, vice president of outreach at Urban Ventures, who helped launch CityKid Java. Today, more than 100 organizations in the Twin Cities, from churches to major companies, serve their coffee, and the nonprofit’s earned income portfolio also includes a farm, mobile markets and a beekeeping business.

In 2015, CityKid Java brought in $754,000 of the organization’s $6.2 million in revenue.

ytnovdec2016_pgs2The group’s success story helps explain the perpetual buzz around earned income, money nonprofits raise from selling goods and providing services, whether it’s launching a coffee brand or running a summer camp. As Urban Ventures learned, a big leap can have a big payoff.

Under federal tax rules, nonprofits are allowed to have earned revenue as long as they don’t stray too far from their mission, but that’s only one of the hurdles they have to clear before jumping into the market. Launching a business requires a clear goal, careful planning and constant attention, say researchers, consultants, and nonprofit leaders.

“Making money isn’t so easy. Business is a competitive place,” said William Foster, head of the consulting practice at the nonprofit Bridgespan Group, which advises mission-driven organizations.

The rise of earned income

ytnovdec2016_pgs3Some nonprofits long have looked to earned income as a way to bring in money – think of the Girl Scouts, who have been selling cookies since 1917, or Goodwill’s resale store model, which launched in 1902 – as well as hospital patient revenues, university tuition and theater ticket sales. In recent years though, the concept has spread among nonprofits of all stripes eager to build and demonstrate their sustainability.

The drumbeat encouraging earned income started in the 1990s as part of a general enthusiasm for running all organizations with a business mindset that stressed sustainability. But when Foster and his colleague in 2005 probed how successful nonprofit earned ventures had been for an analysis in the Harvard Business Review, they found an unsettling picture: Organizations didn’t make the money they expected, and staff members sometimes felt pulled away from their core functions. Nonprofits that did succeed usually had decided to explore a business closely related to their mission, such as workforce development programs that launched a business to employ their clients.

Ultimately, the analysis concluded that earned income was hardly a must-have for nonprofits, and certainly nothing to rush into.

More recently, Foster has seen the overall message to proceed with caution get through to nonprofit leaders. “The more wild-eyed earned income pursuits have diminished,” he said. And groups are more aware than ever that a venture tied closely to their mission is the most likely to yield dividends, both in satisfaction and dollars, he said.

Nonprofits likely will continue to explore earned income in a more measured way, said Nathan Dietz, senior research associate at the Center on Nonprofits and Philanthropy, a research center at the Urban Institute that studies nonprofit trends.

Urban Ventures’ social enterprises -- including a coffee roasting business, mobile farm markets and a beekeeping business -- have brought new donors and community employment opportunities, as well as revenue.

Urban Ventures’ social enterprises — including a coffee roasting business, mobile farm markets and a beekeeping business — have brought new donors and community employment opportunities, as well as revenue.

“If you do it right, it can lead to the big bucks,” he said.

And, earned income ventures by nonprofits also are happening alongside the growth of for-profit companies that have a charitable or social mission and hybrids that occupy some middle ground — all efforts to combine business principles with customary nonprofit goals, Dietz said.

No matter the income-generating structure, organization leaders have to be thoughtful and savvy about what will work in their market and for their mission, he added.

How an earned-revenue program works

Lundquist said nonprofits should be sure to study what customers in their markets want and need. It’s not enough to have a great mission behind a product or service.

“Even though people love the cause, you still have to be cost competitive and you still have to have a quality that exceeds everyone else. People don’t give you $10 for a crummy product.”

Nonprofits also should be prepared for a constant balancing act: keeping an eye on their initiatives’ profits while maintaining their connection to their core mission. Some years may demand a great deal of attention to profits, others a focus on how the business supports the nonprofit’s programs. The key is knowing when you’ve leaned too far in one direction and how to self-correct, said Lundquist.

“People shouldn’t sweat it and use profitability as the only metric of success,” he said.