Class theme was Resource Environments, Philanthropy Social Enterprise/Commercial Income

Table of contents

• Chapter 6, Managing Nonprofit Organizations, Tschirhart and Bielefeld (2012)
• Revolutionizing the Nonprofit Sector Through Social Entrepreneurship File resource, Stecker (2014)
• The Philanthropy Outlook, Marts & Lundy (2017)

Reviewing Chapter 3 of Managing Nonprofit Organizations was also assigned this week

Chapter 6, Managing Nonprofit Organizations, Tschirhart and Bielefeld (2012)

• Just as there are numerous types of nonprofits, there are numerous types of revenue
• A nonprofit following the model of having all or a large majority of its support coming from one source runs the risk of having to shutdown
• nonprofits can reduce their financial vulnerability by developing a diversified funding base
• Complacency is a common problem in nonprofits that believe their funding is secure
• Our understanding of the revenue sources of nonprofits in the United States comes primarily from their tax returns
• $1.41 trillion in total revenues in 2009
  • 76 percent government fees and contracts
  • 22 percent contributions, gifts, and government grants
  • 11 percent other sources such as dues, rental income, special event income, and goods sold
• Hospitals and primary care facilities account for the lion’s share of total revenue, 47.7 percent, and higher education nonprofits make up 11.7 percent of the total revenue
• Only about a fourth of public charities reported more than $500,000 in annual expenses
• about 45 percent of the registered public charities filing a tax return in 2008 had expenses under $100,000
• revenue portfolios vary depending on the type of nonprofit
• aggregate numbers for the nonprofit sector fail to indicate the great variation among nonprofits in their revenue sources
• Government Contracts, Grants, and Vouchers
  • A nonprofit may be the prime contractor, or the subcontractor
  • Government contracts and grants are typically awarded through a competitive process
  • vouchers are coupons issued to individuals who use them to access a service
  • Government funding typically involves some loss of management control, uncertainty due to unpredictable political processes, heavy reporting requirements, and delays in reimbursements and contract payments
  • Government contracts demand fiscal and programmatic accountability and transparency.
  • In countries in which the nonprofit and government sectors are closely intertwined, all funding may come through the government, whereas in other countries no government funding may be available
  • For nonprofits that do seek government funding, here are some recommendations:
    • Encourage government contract sources to coordinate requests for proposal
    • Encourage less duplication of reporting requirements
    • Consider sharing back-office functions with other nonprofits and using management service organizations to assist with government contract management
    • Have at least 15 percent of funding provided by a nongovernment source.
    • Keep two months of operating revenue in reserve to help with cash flow management if government funds are delayed
• Earned Income
  • If sales come through government vouchers, a nonprofit may have to agree to government rules and pricing structures
  • Survival rates for entrepreneurial ventures vary by industry but average about 50 percent after five years
  • In nonprofits, profit maximization is rarely the rationale for setting fees for services. Other considerations for pricing are who will be able to take advantage of the service and how the fee will influence perception of the service
  • Nonprofits may wish to set up legal and other barriers to the reselling of the goods and services they provide.
  • Charging for a product or service can also help to ensure that the client or customer will take advantage of it
  • According to Inc. magazine the earned income model works best when a nonprofit has a valuable product or expertise, the user has some ability to pay, and the nonprofit’s mission is job training or skill building
  • If the earned income activity is a regular activity and not substantially related to the exempt purpose of the nonprofit, a UBIT (unrelated business income tax) payment may be required
  • Some nonprofits get more revenue from selling their donor lists than from the actual donations
  • an earned income strategy is more likely to be viable when it is aligned with the nonprofit’s
    • Culture and values
    • Core competencies
    • Management capacity and time
    • Financial stability
    • Willingness to take risks
    • Access to necessary business skills
    • Length of commitment
    • Existing or potential markets (customers and clients)
    • Competitor relationships
    • Capital requirements
    • Community perceptions
• Membership Fees
  • In 2003, the average 501(c)(3) nonprofit organization in the United States earned less than 1 percent of its revenues from member dues.
  • about 60 percent of the revenues of social and recreational clubs (classified as 501(c)(7) nonprofits) came from dues
  • In some organizations, revenues called membership fees or dues may actually be donations.
• Partnerships with Business
  • Partnerships with for-profit corporations on joint ventures and licensing agreements can come with concerns about weakening the nonprofit’s brand because the nonprofit’s logo is associated with the corporation’s logo
  • Some nonprofits have found that their interests in these agreements may be overshadowed by their partner corporation’s interests.
  • Having set policies on what types of partnerships are allowable and enforcing mechanisms to ensure that the nonprofit’s interests are protected can help the nonprofit avoid criticism
  • important for a nonprofit to understand why a particular business is interested in the partnership
  • Nonprofits should choose their business partners carefully, looking for partners whom they can trust, who have a similar level of commitment to sustaining the partnership, who share the same vision, whose values and norms are compatible with the nonprofit’s, and who can devote the needed time, resources, expertise, and effort
  • Nonprofits may choose to partner with a for-profit business in creating a separate legal entity to produce revenue that is then diverted to the nonprofit.
• Investment Income
  • Endowment campaigns are built on the principle that less funding will be needed in the future by building a significant pot of money now
  • The question of when to invest and when to spend available funds can become a public relations issue.
  • economic conditions have led some nonprofits to suffer from “underwater endowments,” in which the value of the fund is no longer able to support the promised level of withdrawals without reducing the original principal.
  • When investment value falls, nonprofits need to determine whether restrictions set by the original donors allow any changes in spending policies and whether changes are necessary and warranted
  • recommendations are for nonprofits that use investment funds to support their operations:
    • Set a policy on what percentage of the endowment should be withdrawn annually
    • Determine restrictions on the types of investments that can be made based on organizational values
    • Set investment policies based on how much liquidity is needed and how much risk is tolerable
    • Understand and follow the laws regarding investment portfolios and payout requirements
    • Set up procedures and accountable parties to oversee the investment manager
    • Schedule regular portfolio reviews
• Donations
  • Individuals and organizations giving large gifts may expect the recipient nonprofit to give them special treatment and may withdraw support if their interests are not protected
  • Ethical codes of conduct for professional fundraisers make clear the importance of honoring donors’ intentions for their gifts
• Revenue Portfolios
  • If a nonprofit’s budget does not clearly reflect a focus on its core purpose, foundation and government funders may not wish to support it
  • When the revenue-generating activities of organizations in different sectors look very similar, the organizations’ sector identities may be unclear to outsiders
• Not all gifts to nonprofits are given for purely philanthropic reasons.
• Rarely are gifts purely altruistic
• gifts are two-way exchanges that satisfy rational and self-interested motives on the part of both the receiver and giver.
• Giving a gift can help donors influence the success of nonprofits pursuing missions that fi t with their interests
• Andrew Carnegie sense that philanthropy is a moral duty and a professional endeavor
• Types of philanthropic gifts:
  • in-kind gift is one in which a product or service is donated rather than financial currency.
  • A gift may be designated for a specific program or for general operating support
  • may be a gift to an endowment
  • may be a percentage of a purchase, in which the donor receives something in exchange for the transaction
  • may be pledged for the future or immediately given
  • may be unsolicited or a response to an appeal
  • may be anonymous or come with formal recognition and a title.
  • may be arranged so that donors receive financial returns from them, as in the case of annuities
• Sargeant suggests that nonprofits think less about the outcome of a particular appeal to an individual and more about the long-term relationship they are establishing with that individual
• The idea of lifetime value comes from the consumer marketing tradition in which someone who purchases a good is understood to have an estimated potential of making a series of such purchases over his or her lifetime.
• higher levels of giving are associated with higher levels of income, wealth, religious participation, volunteerism, age, and educational attainment and with being married, having U.S. citizenship, having a higher proportion of earned wealth than inherited wealth, and having a greater level of financial security
• effects of gender, ethnicity, and religion have more complex patterns
• Fundraising programs in the United States are typically built on the principle that most of the money in a fundraising campaign comes from a small proportion of the donors
• growing trend - the giving circle, in which individuals come together to make collective gifts to nonprofits
• three main types of foundations that provide grants to nonprofits: private individual or family foundations, company-sponsored foundations, and community foundations
• Donor-advised and designated funds serve as an alternative to private foundations, offering individuals the opportunity to use the infrastructure of the community foundation to manage their gift
• generic grant proposal outline:
  • Executive summary
  • Statement of need
  • Project description
  • Budget
  • Organization information
  • Conclusion
• To increase their chances of being funded, nonprofits should show that their request fits the funding interests of the foundation and that they have followed submission instructions.
• Federated funders, such the United Way and the Combined Federal Campaign, solicit donations through workplaces
• For-profit businesses may provide funding to nonprofits through their advertising, marketing, public relations, or philanthropic budget
• In general, businesses tend to support noncontroversial causes that have wide public appeal or that serve a target market similar to their own
• In addition to providing financial support, corporations may provide services, goods, and facilities free of charge
• The fund development process has multiple steps, and each can be critical in attracting and retaining donors:
  • Identify Your Nonprofit’s Case for Support
  • Define What Mission the Fundraising Goal Would Accomplish
  • Assess the Environment for Gift Giving and Determine Markets
  • Assess the Nonprofit’s Capacity for Fundraising
  • Research and Select Fundraising Vehicles, Prospects, and Approaches
  • Prepare the Plan and the Organization
  • Solicit Gifts, Thank Donors, Steward Gifts, and Prepare to Renew Gifts If Appropriate
• Fund development principles:
  • “people give to people to help people.”
  • Fundraising is built on relationships, more likely to be successful when there is a basis of trust.
  • Success is also more likely when the person asked for the gift believes that people will genuinely be helped by the gift
  • peer relationship may be a basis for trust
  • significant gifts come in all sizes
  • Modest givers should be as welcome as major donors
  • They may give more in the future as they become more closely connected to the nonprofit
  • those closest to the nonprofit are expected to set the pace for a fundraising campaign
  • understand the role of the fundraiser as someone who offers a means for donors to fulfill their aspirations
  • may be through contributions to an annual campaign, endowment campaign, capital or special project campaign, or estate or planned giving
  • Professional fundraisers cultivate relationships with donors, understanding how their needs can match those of the nonprofit
  • As the donors’ interests change, a good fundraiser will adapt to better support those interests
• Nonprofit leaders have the responsibility to understand the positives and negatives of their resource acquisition options. They also need to be accountable to their funding sources.

Revolutionizing the Nonprofit Sector Through Social Entrepreneurship File resource, Stecker (2014)

• heavy reliance on philanthropic and government funding is increasingly not sustainable, especially in the wake of economic downturns.
• social enterprise activities — can improve the sustainability of the business model of nonprofit
• This paper argues that the current funding model of the nonprofit sector should be disrupted in order to achieve a greater level of financial sustainability and mission-driven success.
• Increasing numbers of private foundations and funders are aggressively seeking to support social entrepreneurial ideas
• there are well-founded fears that embracing new models may be financially risky, provide too many ethical dilemmas, or lead to “mission drift”
• economic and political backdrop, coupled with the information and technology revolution, provided fertile ground for the birth of social entrepreneurship
• Social entrepreneurship is a modern global movement that is tackling the complex problems of the world
• Social entrepreneurs are driven and focused like lasers, disrupting unjust systems of inequality and suffering. They identify problems at a systemic level, and build innovative and sustainable solutions
• Social good or benefit, not shareholder profit, is the mission focus
• Social entrepreneurs have much in common with traditional entrepreneurs, and they take risks, have big visions, and embrace a “distinct business orientation”
• They blur the lines of nonprofit and for-profit work, and they are laying the groundwork for how nonprofit organizations will be funded in the future
• five viable models for nonprofit organizations for generating additional revenue streams and for achieving a more sustainable business model:
  • ramping up the selling of branded merchandise
  • embracing a fee-for-service approach
  • founding a separate commercial for-profit enterprise
  • building a hybrid social enterprise
  • transitioning from a nonprofit to a for-profit business
• The blurring of the for-profit and nonprofit sectors is just beginning, and it will continue to slowly move “toward more integrated hybrid forms”
• The number one factor young adults of age between 21 to 31 years want in a “successful career” is “a sense of meaning”

The Philanthropy Outlook, Marts & Lundy (2017)

• Translating the social value of philanthropic engagement into hard data, organizational revenue within the charitable sector is now approaching $2 trillion annually or 5.4% of U.S. gross domestic product (GDP)
• Moreover, growth in staffing and wages within the sector outpaced those in the public and corporate sectors over a recent 10-year period
• despite this growth, more than half of nonprofits recently reported that they have been unable to meet the demand placed on them.
• Recent research reveals that
  • The education subsector has seen relatively large year-over-year gains in philanthropic giving in the last several years
  • Fundraising in the health subsector has produced mixed results in recent years.
  • The public-society benefit subsector has continued to realize varied fundraising results by organizational type
  • Giving to national donor-advised funds has risen by large margins in recent years, but giving to support federated funds has generally been less positive
• Overall, the U.S. should expect continued philanthropic growth for the years 2017 and 2018:
  • total giving rate is expected to rise above the 5-year annualized average for total giving, but will be below the 10-year and 25-year annualized averages
  • All sources of giving are projected to increase their contributions in 2017 and 2018
  • Giving by foundations will see the largest increases
  • Among the recipient subsectors, giving to health will increase the most
• younger generations consider philanthropy to be an investment and that their giving is an extension of their own personal mission
• shifts in the economic and political environments have differentially affected U.S. household finances and have produced questions about policy implications for philanthropy
• technological innovations have expanded the donor-nonprofit relationship by raising nonprofit transparency and providing the means for real-time engagement with stakeholders.
• Innovation will be critical as competition for philanthropic resources heightens and the philanthropic relationship becomes more donor-focused
• Today’s donors want more control over their giving and to understand the impact they are making
• Other factors that will positively influence total giving in 2017 and 2018 include an increase in the number of households that itemize deductions on their taxes
  • how will this be impacted by Tax Reform enacted in late-2017
• In 2017, 70.7% of total giving is expected to derive from individuals/households, followed by 15.6% from foundations, 8.7% from estates, and 5.0% from corporations.
• In 2018, the proportion of giving from individuals/households will decline slightly, while the proportion of giving from estates and foundations will rise slightly
• the estimated average annual rate of growth for giving in the period 2007-2017 is the lowest in the last four decades, at 1.2%
• Giving by Individuals/Households
  • A large body of work demonstrates, with few exceptions, the link between philanthropic giving and both household income and wealth
  • An increase in the number of households that itemize deductions on their taxes suggests that median U.S. household income and wealth are growing.
• Giving by Foundations
  • The majority of the increase in projected foundation giving for the years 2017 and 2018 will be influenced by average to above-average growth in prior years’ GDP, tempered by the projected rise in household and nonprofit net worth
  • may be due to foundations restraining giving in positive economic periods to save grant funding for economic downturns
• Giving by Estates
  • The current projections for giving by estates for the years 2017 and 2018 are below the historical 25-year and 40-year average rates of growth for giving of this type, but above the 10-year average rate of growth of 0.9%.
  • volatility is mostly due to very large bequests made by a few estates in a given year.
• Giving by Corporations
  • As a general rule, corporate giving is associated with corporate pre-tax profits. The negative influence of current-year corporate profits on corporate giving may reflect a reduced need to use philanthropy as a marketing tool and increased current-year production costs that tap into the same company resources used for philanthropic initiatives
• Giving to Education
  • These billion-dollar campaigns are expected to continue into 2017 and 2018, helping to boost overall education giving
  • Moreover, donations of very large gifts are likely to impact giving to this subsector, mirroring the trend seen in the last several years
• Giving to Health
  • The positive relationship between health and education spending and giving to health is complicated
  • Moreover, research has demonstrated that neither health nor education are top giving priorities for particular age groups among the general population
  • Nonetheless, spending on health and education comprises relatively large percentages of households’ annual budgets
  • out-of-pocket healthcare costs rises with age.
• Giving to Public-Society Benefit
  • The public-benefit subsector, in particular, has seen growth in recent years in the use of innovative mechanisms that foster social impact, including impact investing and highly focused funding approaches
  • this particular subsector may not be as resistant to economic downturns as than other areas of giving
  • tends to be affected by trends that influencer consumer behavior among high-income households
• Projected growth in total giving in the years 2017 and 2018 is likely to continue to outpace predicted growth in U.S. GDP
• philanthropy will continue to stake a larger share of the U.S. economic landscape in years to come
• In 2017 and 2018, giving by individuals/households and estates will comprise 79% of total giving
• Foundation giving is expected to comprise 16% of giving in both 2017 and 2018. Corporate giving will maintain its share of 5% of total giving for these years
• Education giving is expected to grow as a percentage of total giving, from an estimated 15% in 2014 to 17% in 2018.
• giving to health will remain stable at 8% of total giving through 2017 and will grow to 9% of total giving in 2018
• share of giving to public society benefit is also expected to grow, from 7% in 2014, 2015, and 2016, to 8% in 2017 and 2018.
• trend demands a donor-centric fundraising approach
• Understanding what drives today’s donor can help nonprofit organizations of all types ensure a strong relationship with current and prospective donors and proactively plan for the years ahead.
• Donor-advised funds have gained rapid traction in recent years. In general, these funds provide donors with more flexibility
• As an example, donor-advised funds allow donors to grow the funds tax-free while simultaneously allowing for immediate grantmaking
• donors are able to contribute a wide variety of assets to these funds and to take an immediate tax deduction
• While donors do not have ultimate legal control over their funds, they do have the right to make suggestions about where and when grants are made.
• Fidelity Charitable Gift Fund is now the second-leading grantmaker of all types (just behind the Bill & Melinda Gates Foundation).
• Reporting $4.6 billion in charitable revenue, the fund raised nearly $1 billion more than the second-ranked United Way ease with which donors can make donations through Fidelity’s online platform has been identified as one top reason why the fund has grown
• Research consistently demonstrates that donors give because of the values they share with recipient organizations
• Other top reasons that donors give include the perception that organizations depend on them and knowing someone specifically affected
• Stepping beyond shared values, today’s donor “expects you to ‘know’ them
• accustomed to personalized experience
• “The capability to truly understand your constituent from a ‘360’ view, build lasting relationships and effectively communicate mission impact that is important to them will set many nonprofits apart.”
• Digital media has become a primary means in which people connect with one another and with organizations
• online environment has sped up the delivery and retrieval of communication, whether in the form of informational content or direct person-to-person communication
• Research indicates that nearly 8 in 10 nonprofits could improve their technology in the area of fundraising
• Despite the relatively slow adaptation into the online environment by many nonprofits, trends suggest that online giving is consistently growing
• Evidence suggests that larger organizations and those organizations that were strategic about enhancing digital fundraising were the most successful in generating increased online revenue in 2015.
• Consider how your organization is not only initially drawing donors to your online site, but how it is keeping donors engaged over the long term
• donors are increasingly turning to crowdfunding
• A 2016 Pew Research Center survey found that 22% of Americans have contributed to a crowdfunding campaign
• More than two-thirds of donors supporting crowdfunds have given to a specific person in need, while a third have supported a school. Nearly 9 in 10 crowdfunding contributors reported that crowdfunds help people to feel more connected to the causes they support.
• the on-demand economy requires that donations to nonprofits be “friction free.”
• The outcome of the U.S. presidential election on policies that affect nonprofits and philanthropic contributions is an unknown factor as the year 2017 begins
• U.S. advocacy nonprofits that work in the areas of civil and human rights, the environment, and support of minority groups saw a surge of donation
• raises two questions:
  • Are organizations ready for unexpected donations?
  • Are organizations prepared for both the positive and negative outcomes of the political and economic environments?
• potential policy trends may help to boost philanthropic giving from corporations, foundations, and wealthy donors, in particular