Although every nonprofit has a mission statement that defines the organization’s core purpose and work, many are unaware of its useful companion, the business model statement: A brief summary that spells out the organization’s economic drivers. Like a mission statement, a business model statement acts as a touchstone: a reminder and a guide for the organization’s focus and strategies.
Nonprofit executives and board members usually have a good sense of the various types of funding that support the organization, but they may have a harder time explaining the organization’s business model. Let’s imagine a childcare center with the following mission statement: “We provide high quality child care in a cross-cultural setting.” A first draft of their business model statement might read: “Our funding comes from government, parent fees, and fundraising.”
This statement lists all the types of funding, but doesn’t speak to the strategy for financial sustainability of the center. A second draft may come out this way: “We provide high quality child care for children with diverse racial, cultural and economic backgrounds, by combining government subsidies for low-income children with full-pay tuitions, supplemented with some parent fundraising.”
Although this statement lacks graceful wording, it does explain the organization’s strategy for financial sustainability, and it links that financial strategy with its program strategy. While mission statements are meant to be external messages as well as internal guides, a business model statement is primarily for internal use.
A Latino theater offers another example of a business model statement: Their first draft stated, “We produce plays and conduct youth workshops, sustained through a mixture of ticket sales, foundation grants, workshop fees, and an annual benefit.”
Similar to the childcare center’s model, this descriptive statement contains all the elements of the business model — the methods by which the organization accomplishes its mission and generates revenue. But while it lists the programs and revenue streams, it’s not specific about the drivers for either the programs or finances. The business model statement should help focus the leadership’s attention on what keeps this organization sustainable. A more focused business model statement was developed: “We produce Spanish and English plays supported by ticket sales and foundation grants, and supplemented by net income from youth workshops and an annual gala.”
This straightforward sentence describes how the theater is sustained financially. It states bluntly that youth workshops and the gala are supplemental to the production of plays, the central purpose of the organization. It can serve as a reference point for staff and board when making choices, just as a mission statement does.
Let’s look at two other pairings of mission and business model statements:
- Coalition mission statement: “We are a coalition of faith-based and other institutions working to improve life in the Cranberry River Neighborhood.”
- Coalition business model statement: “Our focus is to return financial and policy value to the congregations and nonprofits in the coalition. We are member-funded, supplemented with foundation grants for special initiatives.”
- Education reform mission statement: “Our mission is to apply current learning theory and best management practices to improve outcomes for K-12 students in the District.”
- Education reform business model statement: “We bring current learning theory and best management practices to the district, led and supported by a few committed individual and foundation donors who share the same vision for education reform.”
In the spirit of learning by example, here are some additional business model statements:
Food bank business model statement: “We obtain donated food from businesses (85%) and individuals (15%), sorted and distributed largely by volunteers, and financially supported by individual donors and the community foundation.”
Comment: This internal statement reminds the organization of the importance of in-kind (non-cash) donations of both food and labor, and keeps people on track when thinking about the organization’s major donor strategy.
Affordable housing: “We build affordable housing for low-income people where government and developer fees are available.”
Comment: This statement clearly articulates the conditions necessary in order for the organization to act.
Following is an example of how two organizations might share similar mission statements, but employ very different business models:
Mission statement for both Organizations A and B: “Our mission is to develop and implement evaluation tools that help nonprofits identify, understand, and increase their impact.”
- Organization A’s business model statement: “Foundations contract with us to conduct evaluations with their grantees.”
- Organization’s B’s business model statement: “We develop and promote evaluation tools and processes that are affordable –and therefore can be purchased directly by nonprofits.”
One way to begin developing a business model statement is to solicit ideas at a management team meeting. Start by asking each person to write down the answer to this question: “What is our organization’s business model?” Collect those statements, then ask for written replies to the follow-up question: “What is our organization’s strategy for financial sustainability?”
A wide array of answers will typically surface to both questions, an array that itself will be illuminating to the group. Presenting several of these statements to the board is an effective way of engaging the board in thinking through the organization’s financial strategy. Remember that a business model statement need not be wordsmithed into a document that needs to be shared with the public.
When considering starting a new program, nonprofit managers and boards often ask themselves, “Would this program help drive the delivery of our mission?” In a similar way, when managers and boards consider where to invest time, attention and resources, another touchstone question should be: “Does investing in this project strengthen the success of our business model?”
This article is adapted from a section in a forthcoming book, Nonprofit Sustainability, by Jeanne Bell, Jan Masaoka, and Steve Zimmerman.
- What’s the Best Way to Raise Money? Choosing a Revenue Strategy
Josi B says
I am in the very VERY early stages of starting a nonprofit in my community.The farthest I have gone so far is to speak with my local United Way, writing a Mission Statement, writing a Vision Statement, and possibly have selected a name for the organization. I am right now going through a Business Plan and that’s how I found this article. Jan, is there any advice that you have? Is The Best of the Board Cafe something I should be looking into?
Sheronda Watty says
I am experiencing the exact same thing. Wish I could be more helpfull.
It seems it has been a while since you posted any updates. I’m in the arena of looking to make a non-profit home development. Would love to connect. Here is my email: email@example.com. Please send me an email and we can chit chat. Hope to hear from you soon.
Building Up says
This is a great article and one that I will be able to pull points from with recognition of your work, of course to use in my various training pieces with organizations. Thanks for sharing this. p.s. I use your The Best of the Board Café a lot as a reference in my training to non-profits.
Thank you! Even though many organizations don't go all the way to creating a Business Model Statement, the idea is exciting and appealing to be able to communicate a business model concept! Jan
As a followup-remark, I would only add that I incorporated the Business Model statment into a strategic planning session for a non-profit, and it was a great tool for shifting the focus of the discussion from a pie-in-the-sky glittering vision to a more real examination of sustainability. It was a very helpful tool for me to use. Thanks!
How great to hear this! Please consider sharing the business model statement you develop either with Blue Avocado readers here, or just with me and my co-authors, Jeanne and Steve. Thank you so much for letting us know! Jan
I am currently leading a restructure of a local United Way organization. While some mission and vision tweaking are in order a business model statement will now be a priority. One of the major issues is sustainability. The volunteers leading this initiative will be better able to base their financial restructuring in reality when using this model and incorporating BIll Musick’s suggestions. Thank you!
This is a very helpful article: I’m about to facilitate a strategic planning retreat, and I will certainly incorporate this exercise into the activity. I think every organization’s leadership team needs to think about this concept.
Really good and helpful. I agree with Dan–Blue Avocado has invaluable suggestions!
I want to know when that book comes out. My work is in the church which is sadly lacking in this particular statement. (When book comes out, please contact me at: firstname.lastname@example.org)
Ours would currently be; "We support ourselves through plate, projects, and then the miracle."
Blue Avocado has lately been scoring at least one major useful article each issue lately.
This is an interesting concept, but what is the process by which community benefit organizations determine what their business model should be, rather than what its revenue streams currently are?What is not articulated in the article is the framing of any assessment of business models by identifying and aiming the organization at a vision for the community. What is the end goal that sets the context for defining mission and business models? What potential exists for a food bank if it sees its work within the context of improved nutrition, health, and empowerment of its community rather than supplying food paid for by various streams of revenue? What new forms of revenue, collaboration, and energy might accrue to the food bank that first aims at the highest potential that it can contribute to its community? Bill Musick – Tower Hill Resources – Honolulu, HI
Thanks for writing, Bill. If there were space in this one article, I would certainly have addressed some of these topics as part of the article. In fact, the whole book that I’ve just written with Jeanne Bell and Steve Zimmerman (out fall of 2010) is exactly about how to define a business model for an organization that is about mission and mission impact. I do think that while few community nonprofits define themselves by their business models, they also know that a business model for sustainability is important, and that such a business model is a tool in support of mission impact. Thanks again, Bill, Jan
This is a helpful analysis because you look at both the program strategy and the revenue strategy that support the mission. However, the economic drivers for the business model include more than revenue. They include:
It is important to look at all financial elements to understand the likely financial success of the organization.
Excellent points, David. Thank you. Jan
Great points. Is there a concise article that covers all of these?
Here is a set of definitions for each of the economic drivers:
a. Revenue model = money given to you by clients, donors and any other sources
b. Gross margin model = revenue – cost of goods sold (all the expenses directly related to producing or delivering your program activities)
c. Operating model = all the other day-to-day costs that must be incurred in addition to cost of goods sold
d. Working capital model = current assets – current liabilities
e. Investment model = how much cash you will need to get the organization launched + how much cash you will need post-launch to achieve break-even cash flow
I am not aware of a concise article that covers this analysis. If you are interested, you can see a description of how you can use these drivers in “Getting to Plan B” by John Mullins & Randy Komisar. While this analysis is approached from the perspective of developing a business, the economics apply as well to a non-profit. After all, a non-profit is a business. It needs sound finances in order to operate.
Very helpful and well thought out article.
A very helpful article on an often-neglected aspect of planning in the nonprofits.