How Do Nonprofits Make Money?

Nonprofit organizations play a vital role in communities by providing services, driving social change, and enriching people’s lives. However, running a nonprofit requires money. Unlike for-profit businesses, nonprofits cannot rely on the sale of products and services to generate revenue. So how do nonprofits get the funding they need to operate?

There are several key ways that nonprofits make money and sustain themselves financially. Let’s take a deep dive into the main nonprofit funding sources.

Donations from Individuals

Donations from individuals are a critical source of financial support for most nonprofits. These donations can take various forms:

Direct Cash Donations

The most straightforward way individuals support nonprofits is through direct monetary gifts. Nonprofits actively fundraise from individual donors through campaigns like annual giving, crowdfunding, end-of-year giving, and giving days. Donors may make one-time gifts or set up recurring monthly donations.

Planned Giving

Individuals sometimes name nonprofits as beneficiaries in their wills, trusts, or life insurance policies through planned giving. These legacy gifts allow donors to make a lasting impact through a nonprofit.

In-Kind Donations

In addition to cash, individuals also support nonprofits through in-kind donations of goods and services. Examples include donating professional skills, supplies, food, clothing, cars, or real estate. These non-cash gifts help nonprofits reduce expenses.

Volunteering

Volunteer time is another valuable in-kind gift from individuals. By volunteering, people donate their time and talents to help nonprofits in hands-on ways. This boosts the organization’s productivity and impact.

Government Grants

Government grants are another significant source of funding for nonprofits. Grants come from federal, state, and local government agencies.

Competitive Grants

Many government grants are competitive. Nonprofits apply by submitting detailed proposals outlining their project plans, capacity, and budget needs. A review panel selects the strongest applicants. Common examples are arts grants from the National Endowment for the Arts and humanities grants from the National Endowment for the Humanities.

Non-Competitive Grants

Some government grants are non-competitive. As long as the nonprofit meets the eligibility criteria, they are awarded funds through a formula. Head Start grants for preschool programs are an example of federal non-competitive grants.

Government Contracts

Governments also pay nonprofits to deliver specific services through contracts. A homeless shelter may have a contract with a city to provide a set number of shelter beds. Or a nonprofit job training program may have a workforce development contract with a county government.

Earned Income

Some nonprofits generate earned income from business activities related to their missions. This commercial revenue supplements fundraising and grants. Types of nonprofit earned income include:

Fees for Services

Nonprofits often charge modest fees for the services they provide. A community theater group may charge for tickets to performances. A nonprofit fitness center may charge membership fees. These fees help cover a portion of operating costs.

Sales of Goods

Nonprofits that produce tangible products can sell them. For example, a bakery training unemployed people may sell the baked goods they produce. Or an animal shelter may sell merchandise like t-shirts and calendars featuring adoptable pets.

Social Enterprises

Social enterprises are business ventures embedded within nonprofits to generate revenue for their cause. They combine business principles with a social mission. Examples include thrift stores, job training cafes, and solar installation done by a nonprofit. The business income helps sustain the nonprofit’s programs.

Foundation and Corporate Grants

Philanthropic foundations and corporations are another essential source of support for nonprofits. The application process for these grants is competitive like government grants. Funders look for nonprofits whose work aligns with the foundation or corporation’s priorities.

Private Foundations

Private foundations like Ford, Gates, and Rockefeller give billions in grants each year. Grant amounts vary widely but can sometimes be in the millions for multi-year project funding.

Community Foundations

Community foundations pool donor gifts into funds that support local nonprofits. These place-based foundations offer smaller grants tailored to community needs.

Corporate Foundations

Many corporations have affiliated foundations like the Bank of America Charitable Foundation or Caterpillar Foundation. They invest in causes aligned with the company’s interests and geographic footprint.

Corporate Giving Programs

Beyond foundations, many corporations have direct giving programs. They donate to nonprofits to give back and boost their brands.

Fundraising Events

From fun runs to galas, fundraising events help nonprofits generate support and awareness. While events require significant upfront investments, they can pay off through ticket sales, sponsorships, auctions, and donations raised at the event.

Walk/Run/Bike-a-Thons

Participatory athletic events like walkathons, fun runs, and bike rides raise money through registration fees and participant fundraising. People collect donations from their social networks to support their involvement.

Galas and Benefit Concerts

Formal galas with dining and entertainment along with benefit concerts leverage ticket sales and sponsorships for fundraising revenue. These glitzy events attract donor support.

Auctions

Silent and live auctions at nonprofit events let supporters bid on donated items ranging from gift baskets to vacation getaways. This turns in-kind donations into fundraising dollars.

Tournaments and Competitions

Friendly competitions like golf tournaments, spelling bees, robotics competitions, or video game tournaments motivate participants to fundraise while creating fun engagement opportunities.

Membership Programs

Nonprofits with built-in constituencies like museums, zoos, and public radio stations generate income through membership programs. Members pay annual dues in exchange for benefits like free admission, discounts, gift shop perks, and insider opportunities.

Higher levels of membership like patron, benefactor, or gold circle offer exclusive perks at higher price points. This tiered model maximizes membership revenue potential.

Endowments

Some larger nonprofits have endowments – funds invested to generate annual income through interest and appreciation. Colleges and universities rely heavily on endowment income. Other nonprofits may have smaller endowments to provide annual support.

The principal gift amount is preserved while the investment growth pays out income each year. Endowments offer built-in financial sustainability from these forever funds.

A Diversified Funding Mix is Ideal

Rather than relying on just one type of funding, it’s ideal for nonprofits to cultivate a diversified funding mix. This makes them less vulnerable to fluctuations in any single income source.

A balanced funding portfolio might combine:

Annual support from individuals
Government grants
Earned income ventures
Corporate sponsorships
Foundation grants
Memberships
Endowment payouts

This blended model creates financial sustainability over the long-term. Nonprofits must be savvy about leveraging the full range of income generation strategies available to them.

Frequently Asked Questions About Nonprofit Funding

Here are answers to some common questions about how nonprofits fund their operations:

How much should come from donations vs. earned income?

There is no perfect split. The balance depends on the nonprofit’s business model and community support. Heavily relying on either income source has risks. Nonprofits should aim for diversification.

What percentage of nonprofit funding comes from government?

Government support accounts for around 30% of nonprofit funding. But this varies greatly by subsector. For social services, government funds up to 60% of budgets. Arts and environmental nonprofits receive less than 10% from government sources.

How do nonprofits pay for administrative costs?

Nonprofits use a mix of funding sources to cover fixed overhead costs like rent, utilities, staff salaries, technology, office supplies, insurance, etc. Each funding source contributes its fair share to these expenses.

Should 100% of donations go to programs?

No – funding programs requires basic organizational infrastructure. While nonprofits should minimize overhead, zero overhead is unrealistic. Around 25% for overhead is considered reasonable.

How much of fundraising event income goes to causes?

Industry guidelines recommend events spend no more than 35% of gross revenue on direct costs, allowing 65% to go to the nonprofit’s mission. This varies based on the size and cost structure of each event.

Conclusion

Successfully funding a nonprofit is complex, requiring mastering diverse income generation techniques. While challenging, a well-balanced funding approach provides stability and empowers nonprofits to maximize their strategic impact. With smart planning and execution, nonprofits can develop the reliable financial base necessary to advance their visions for change.