Why Earned Income Isn’t All It’s Cracked Up To Be

Article Highlights:

• Nonprofits need to start asking, “How do you define sustainability?”
• Mission Drift
• Solution or Second Job?
• Earned or Philanthropic Income?
• Pop Quiz: When Should Nonprofits Pursue Earned Income?
• First Protect Social Impact

Nonprofits need to start asking, “How do you define sustainability?”

“When will your organization be sustainable?” This question is asked of nonprofits at an increasingly alarming rate in recent years. Where did this come from and who decided it is such a critical metric of success? More importantly, how can you determine whether becoming a social enterprise is right for your nonprofit?

While every nonprofit should strive to diversify revenue and ensure sustainability, the philanthropic sector does incredible work through organizations funded largely, if not solely, by charitable giving. Stop assuming that being sustainable means you need to focus exclusively on earned income and start asking, “How do you define sustainability?”

Mission Drift

Nonprofits need funders who give to a philanthropic organization because they believe in its ability to resolve a social issue. Impact investing mobilizes capital not traditionally used for social impact and leverages it to create positive outcomes for individuals and community. Unfortunately, there can also be unintentional, negative outcomes of this ongoing intention to blend private and philanthropic sector principles.

One of these is that implementers are increasingly under the impression that funders believe earned income models are the gold standard for all nonprofits. When a philanthropic institution feels pressure to shift its focus from social impact to become a viable business in order to appear attractive to funders, “mission drift” becomes common.

Solution or Second Job?

When asking about “financial sustainability,” what funders often want to know is “when will your organization no longer need our money?” If many nonprofits were to answer honestly, their response would likely be: “I will stop needing your money when we have solved the social problem we are working on together.” Unfortunately, the answer is often, “I will no longer need your money after we build this goat milk farm to support our physical disabilities center for children living in poverty.

If we can manage to make both organizations run well at the same time (even though I have no business training and my passion is improving the health of the disadvantaged), we’ll do great!” Instead of viewing a social enterprise as an ATM machine, it should be thought of as an investment that directly advances your mission. Starting a separate business to fund your nonprofit is not a solution; it is a second job. So, when does an earned income stream make sense?

Earned or Philanthropic Income?

Is earned income really a silver bullet or is philanthropic income just as powerful? This drift towards 100 percent earned income has contributed to the misguided impression that socially conscious businesses can fill social need better than philanthropic institutions. But this is simply not the case. Take United Way Pierce County (UWPC), my hometown sweetheart nonprofit doing incredible work since 1921.

UWPC receives $6 million in revenue, 92 percent of which is philanthropic, and it is the community leader for serving disadvantaged children and families in the Puget Sound area of Washington State. In 2018 alone, UWPC reports helping 81,000 people access food, 5,200 children get childhood development services, 5,600 families find rental assistance, and 2,700 reach emergency shelters. It is known as the resource hub for those seeking urgent support in the area.

What would happen if UWPC decided to shift its focus from serving at-risk families to becoming a majority earned income enterprise? Their currently lean 19 percent administration and fundraising costs would dramatically increase and their social return would suffer. In many cases in the philanthropic sector, seeking a profit versus offering help is not a reasonable option.

So, why is earned income suddenly better than philanthropic income? Have we forgotten that 80 percent of businesses fail in the U.S., let alone in developing countries and high-risk regions where many nonprofits operate? Having a community you intend to serve be wholly dependent on the market is a risk. Starting a business is inherently perilous and most of them fail, so don’t risk your nonprofit’s mission on your enterprise taking off.

One example of this is the evolution of BeadforLife and Street Business School (SBS). SBS is an entrepreneurial education nonprofit that aims to alleviate poverty through business and women’s economic empowerment, increasing a women’s earnings from an average $1.35 to $4.19 per day. Since 2016, SBS scales through a social franchise model in which nonprofits pay to become SBS-certified and bring entrepreneurship to women in the local community.

SBS initially began as a program of BeadforLife. BeadforLife is a social enterprise that, for the better part of a decade, derived nearly 92 percent of its funding from the earned income it generated from the sale of recycled paper bead products. But the program could not sustain this level of funding. Market fluctuations, imitator organizations, and product saturation affected its funding and therefore, its impact. As earned income declined, BeadforLife began to look at fundraising as a safeguard to protect the women it served.

The issue isn’t that earned income is bad, but that focusing on it as a sole source of income, or preferred source of income, isn’t right for a lot of organizations. BeadforLife’s sister organization, SBS, learned from this experience and chose to diversify and combine philanthropic and earned income in the form of franchise training fees, philanthropic giving, healthy savings, and multi-year commitments to create a long-term vision for “sustainability.”

While a program of BeadforLife, it had 1,900 entrepreneurs trained over 11 years. Since this hybrid model of social franchising and blended capital within the last three years, SBS has graduated an additional 15,000 women and another 25,000 in the queue.

Pop Quiz: When Should Nonprofits Pursue Earned Income?

While there is definitely a unique financial case for incorporating earned income into nonprofit revenue models, the important question is whether or not it makes sense for your nonprofit to move in this popular direction.

Here is a quiz to determine if your organization is well positioned to implement earned income strategies:

1. You combined philanthropic giving and income from products or services as a strategy to diversify income streams since neither is a sure thing. One point.
2. Serving your customers advances your mission. For example, SBS’ clients are nonprofits paying for entrepreneurship training. One point.
3. You employ the marginalized community you aim to serve. If your mission is ending homelessness and you create a business to employ at-risk people who may end up on the street without a job, then you’re advancing your mission. One point.
4. Sales are a direct, rather than indirect, contributor to social impact. For example, the sale of fortified maize to the malnourished. One point.
5. Your funders are social return focused. If ever you are completing an application and there is one question on social impact and 19 questions on financial details, you likely have a funding partner who will eventually walk because you aren’t a business or pressure you to be one at the expense of impact. Funders are social return focused. One point.
6. You leveraged earned income in a way that is germane to for-profit capital. For example, you aligned the corpus of your endowment with your organization’s mission of gender equality through gender lens investments. One point.

Did you get three points or more? If not, you might need to start having some honest conversations with your partners about what it means to have fiscal health and protect social impact.

First Protect Social Impact

Philanthropic giving has had a series of banner years, passing the $400 billion mark in the U.S. alone last year according the The Chronicle of Philanthropy. (USA, 2018) What would happen if we were to champion philanthropic income as much as earned income as a means to expand and scale social impact? Could we see even more funds flow to nonprofit donations if earned income wasn’t considered such a panacea?

Ultimately, when the purpose of money is to create positive social impact, donors should consider giving to an organization that knows what it’s good at, focuses on that goal, and unwaveringly focuses on social returns.

And nonprofits need to stay true to their missions and commitment to impact, versus chasing this new shiny object.

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