For-profit organizations exist to make money. The money earned from goods and services goes to pay the business owner, shareholders, investors, and others involved in the organization. With non-profit organizations, however, profit isn’t the end goal. Humanitarian organizations, NGOs, hospitals, political organizations, labor unions, professional associations, museums, and even some government agencies can all be classified as non-profits. If the goal isn’t to generate profit, how do non-profits make money? Do people who work for non-profits get paid? In this article, we’ll explore how non-profits make money and how that money is managed when it comes to paying operating costs and salaries.
Non-profits rely on several funding sources, including grants, private donations, and product sales. While there are rules about how money is used, non-profits can pay their staff – especially directors and CEOs – very well.
How do non-profits make money?
Non-profits don’t exist to make a profit, but they have to make money to perform the work they’re committed to. Without a reliable revenue stream, non-profits will fail. However, because they are tax-exempt organizations, how they earn and manage their money is different than if they were for-profit. Here are four ways non-profits earn the money they need to thrive:
A) Grants
For many nonprofits, grants (which is money given to a nonprofit that they don’t have to give back) make up a decent chunk of their budgets for the year. According to Instrumentl, an organization that provides grant and funder data to nonprofits, there are four types of funders that give grants: private family foundations, corporate foundations, public foundations, community foundations, and the government. In the United States, there are about 87,000 foundations giving grants and 900+ federal grant programs.
What kind of grants are out there? The IDC Giving Group describes five:
#1. Start-up/seed grants
If you’re a new nonprofit looking for free money, a seed grant is likely your best bet. These are usually the only grants a young nonprofit can get at first because the amount tends to be small, so the funder isn’t risking much. The nonprofit will need to meet certain criteria first, such as getting nonprofit status and establishing a board. Foundations only want to give money to nonprofits that know what they’re doing.
#2. Program grants
If there’s a specific program your nonprofit wants to launch, look for foundations offering program grants. You’ll need to detail the project’s purpose, budget, timeline, and so on. You can expect between $25,000-$250,000 for grants like this.
#3. Capital grants
When a nonprofit needs a new building – think a new hospital building, a museum room, a church building, etc – you can look for foundations giving capital grants. This type of grant is usually large because construction is so expensive. A nonprofit should be ready to provide building plans and cover some of the costs themselves since there’s no guarantee a capital grant will pay for everything.
#4. Conditional grants
Grants don’t have to be paid back, but some of them come with strings. A nonprofit will often only get the funds from a conditional grant when they’ve raised a set amount of money from another source. At this point, the funder usually matches the amount raised.
#5. General operating grants
These grants help a nonprofit stay operating. These can pay for rent, salaries, and other operating costs. According to the IDC Giving Group, however, these types of grants are rare because the risk of abuse is too high.
B) Private donations
Many nonprofits rely heavily on private donations. According to data from the National Philanthropic Trust, individuals were the largest source of charitable giving in 2021. They gave over $320 billion in the United States, which represented 67% of total giving. Individuals can give through a variety of channels, such as:
#1. Monthly giving
Visit a nonprofit’s website and you should see a tab describing its recurring donations program. You can usually choose a specific amount you want to give each month or even customize it. If the program is good, the nonprofit will describe what your donation will pay for. Monthly giving is extremely important to nonprofits because it provides consistency. It also makes giving easy for donors. They just have to give their information once and the payment goes through automatically until they cancel it. If a nonprofit can keep and increase its monthly givers, it can continue to make money for its programs.
#2. Email marketing
It may seem old-fashioned, but email marketing still works. It’s one of the best and most cost-effective ways to reach a lot of people at once, promote other ways to reach your nonprofit, and meaningfully engage with donors. According to 2021 research, 77% of marketers saw an increase in email engagement throughout the year. To make the most of an email marketing strategy, nonprofits should keep a close eye on what messaging resonates, how many emails are too many, and what email platforms work best.
#3. Events
Fundraising events are a great way to earn money, especially from larger donors willing to buy tickets for annual galas, performances, and more. In addition to entertaining the guests, fundraising events are opportunities to promote specific programs and describe what the nonprofit has accomplished over the year. Many fundraisers also hold raffles with items donated by local businesses. Raffles are a low-cost, engaging way to raise money on the night of an event.
C) Product sales
While selling products may seem like something only for-profits can do, non-profits can, too. There are certain rules they have to follow if they want to remain untaxed. The big thing to remember is all product sales must relate to the organization’s purpose. If they’re not, the non-profit may be hit with “unrelated business income” (UBI). A non-profit can pay a UBI tax while remaining a non-profit, but mishandling things can lead to trouble with their non-profit status. If a nonprofit wants to avoid UBI, here are three rules to remember:
#1. Ongoing product sales have to directly relate to the nonprofit’s mission
Ongoing product sales include T-shirts, mugs, hats, stickers, and other items sold in a non-profit merchandise store. If the non-profit wants to avoid UBI taxes on any revenue generated by these sales, they have to prove these are related business activities. If a piece of merchandise only has the non-profit’s name on it, but sales are not earmarked for anything specific, it may or may not be considered related enough. On the other hand, if merchandise sales go to a program the non-profit wants to launch, this revenue would most likely not be taxed. These are issues a non-profit needs to figure out before tax time.
#2. Products that don’t directly relate to the organization’s purpose can only be sold temporarily
Every year, the Girl Scouts organization sells cookies between January and April. The reason they don’t sell year-round is that the cookies don’t promote the Girl Scouts and aren’t directly related to the group’s purpose. However, selling the cookies for just a few months each year makes this a fundraising campaign, not a retail activity. The Girl Scouts also avoid UBI taxes because volunteers sell the cookies.
#3. The products are sold for the convenience of members
If you’ve ever visited a zoo or museum, you’ve very likely stopped in a cafe or restaurant there. Most zoos and museums are non-profits, but they’re able to generate tax-free revenue from food sales. The reason is that the cafe/restaurant benefits those visiting the non-profit. It relates to the non-profit’s mission by enhancing visitors’ experience and allowing them to stay on-site. It’s also convenient for the non-profit’s employees and volunteers.
How do operating costs and salaries work for non-profits?
Nonprofits use their revenue to pay for operating costs. Besides paying for the actual programs and services that make up the nonprofit’s mission, operating costs include fixed expenses (like monthly rent, utilities, etc), flexible expenses (like car rentals, hotel rooms, event space, temporary employees), and salaries. If there’s extra money left at the end of a fiscal year, it cannot personally enrich the nonprofit’s board or owner. Non-profits are only allowed to use extra money to support the organization’s mission.
Many non-profits depend heavily on volunteers, but they are allowed to pay employees without losing their tax-exempt status. They can also pay interns, though many nonprofits have yet to prioritize compensation for their interns. Someone might start as an unpaid volunteer or intern and then be offered an entry-level job. How much they’re paid depends on their experience, education, position, and the non-profit’s budget. Because salaries are considered an operating cost, the money non-profits earn can go pay salaries. According to ZipRecruiter, the average non-profit salary in the United States is $51,328/per year.
What about higher-level employees like directors and CEOs? In the United States, the IRS says non-profits can pay their executives “reasonable compensation.” There’s no set definition for what this means. Factors can include how much education and experience the job requires, how much other organizations are paying their executives, and the non-profit’s size and budget. Big organizations like Goodwill often pay their executives huge salaries, which can cause issues. In 2005, Goodwill’s Portland, Oregon branch president had to agree to lower his salary by 24% after the attorney general found his $838,508 yearly salary was “unreasonable.” By 2019, however, he was making almost a million dollars again. As part of good leadership and governance, nonprofits need to frequently consider what “reasonable” means and whether high salaries damage their mission.
