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.