How Do Nonprofits Make Money
Many assume that nonprofits don’t need revenue like businesses do. However, while nonprofits aren’t driven by profit, they require steady income to cover operating costs, fund programs, and support initiatives. Without reliable revenue, even impactful organizations like American Red Cross and Doctors Without Borders would struggle to meet their goals. It’s imporant for nonprofit leaders, staff, and supporters to understand diverse revenue sources and how each plays a role in maintaining financial health. This knowledge helps stakeholders appreciate why ongoing support and sustainable income are essential.
Where Do Nonprofits Get Their Money
To achieve stability, nonprofits use various funding sources: individual donations, corporate sponsorships, government and foundation grants, and income from services or products. Each source contributes uniquely, helping reduce reliance on a single income stream. By diversifying their funding mix, nonprofits like Habitat for Humanity and World Wildlife Fund (WWF) can remain adaptable and resilient, even during economic shifts.
1. Individual Donations
Individual donations are the lifeblood of many nonprofits. Contributions from supporters of organizations such as St. Jude Children’s Research Hospital and The Nature Conservancy show the power of individual giving in supporting missions. Nonprofits build strong donor relationships through regular updates on how funds are used, personalized thank-yous, and other engagement strategies. Donors may contribute one-time gifts, set up recurring monthly donations, or give significant sums as major donors. A robust donor recognition program, like that of Planned Parenthood, deepens connections and encourages ongoing support, providing financial stability and an enthusiastic base of advocates.
2. Corporate Donations
Corporate sponsorships bring funding and visibility. Companies often partner with nonprofits to enhance corporate social responsibility efforts. For example, UNICEF collaborates with IKEA on health and education initiatives, and Feeding America works with Walmart to combat food insecurity. These partnerships offer benefits beyond financial support, including increased exposure and credibility. Collaborating with respected brands can open doors to new supporters and partnerships, further strengthening the nonprofit’s presence. Partnerships like those between Habitat for Humanity and Lowe’s showcase how corporate alliances benefit both the nonprofit and the sponsoring company by creating a positive public image while supporting impactful work.
3. Government Grants
Federal, state, and local government grants are a significant revenue source for nonprofits focused on social services, education, and healthcare. Programs like the Head Start Program , which provides early childhood education, rely heavily on government grants. Similarly, Meals on Wheels uses grants to support senior nutrition programs. Government funding requires a strong proposal and careful compliance, as seen in organizations like AmeriCorps, which supports community service projects. Nonprofits that align closely with government priorities, such as environmental nonprofits partnering with the EPA’s grant programs, often gain access to long-term grant opportunities.
4. Private Foundation Grants
Private foundations offer substantial funding opportunities for nonprofits through grants focused on specific causes. For instance, the Bill & Melinda Gates Foundation supports health and poverty alleviation projects globally, while the Ford Foundation focuses on social justice initiatives. Foundations vary from small family-run entities to large, globally recognized institutions, each with unique priorities and grant criteria. By aligning proposals with foundation missions, nonprofits can increase their chances of success. Long-term partnerships with foundations, like those established by MacArthur Foundation and Rockefeller Foundation, can provide consistent funding, supporting financial stability for organizations over time.
5. Earned Income from Services
Some nonprofits generate revenue by providing services aligned with their missions, such as Goodwill Industries, which runs retail stores selling donated goods to fund job training programs. YMCA charges fees for its health programs and memberships, which support its wellness initiatives. Offering these services not only creates income but also extends the organization’s reach, as seen with Kiva, a micro-lending nonprofit that charges small transaction fees to fund global loans. The American Heart Association uses certification fees for CPR training to fund health research, while Girl Scouts of the USA relies on cookie sales for funding youth programs. Earned income can be important, enabling organizations to maintain steady cash flow while remaining mission-focused.
6. Merchandise Sales
Branded merchandise offers nonprofits an additional revenue stream while increasing visibility. For example, PETA sells apparel and accessories to fund animal rights initiatives. Similarly, The Trevor Project uses branded items to raise funds for LGBTQ+ youth support. WWF offers apparel and accessories that promote environmental conservation, while American Cancer Society sells products supporting cancer research. Merchandise is also a significant income source for National Geographic Society, which supports research and conservation through product sales. Selling branded items gives supporters a tangible way to connect with the mission, spreading awareness while supporting the nonprofit financially.
7. Fundraising Events
Events are essential for building community and revenue. For example, the Race for the Cure organized by Susan G. Komen Foundation raises funds for breast cancer research, while Light the Night Walks by the Leukemia & Lymphoma Society support blood cancer research. Events like Charity: Water‘s fundraising galas (Charity: Water) help fund clean water initiatives. The American Heart Association holds Heart Walks to support cardiovascular programs, while Best Friends Animal Society hosts adoption events that raise funds and foster community connections. Successful events require planning, but they are highly effective for building engagement and support.
8. Online Fundraising
Online fundraising has enabled nonprofits to reach vast audiences and new donors. Save the Children uses digital campaigns to support child protection. The Ice Bucket Challenge, launched by the ALS Association, became a viral campaign that raised funds and awareness for ALS. Similarly, Doctors Without Borders uses digital appeals to fund medical missions. The Human Rights Campaign also leverages online fundraising to support LGBTQ+ rights, and Oxfam America frequently runs social media campaigns for poverty relief. Digital platforms help nonprofits attract small, one-time gifts from a broad base, which can collectively support large projects.
9. Membership Programs
Membership programs provide reliable funding and a sense of community. For instance, the Sierra Club offers memberships that support its environmental efforts, and the National Audubon Society provides birdwatching resources to members. MoMA uses memberships to support art exhibitions, while PBS provides perks for supporters of public media. The National Geographic Society also relies on memberships to fund its exploration and education projects. Loyal membership bases are less affected by external economic factors, providing stability.
10. Planned Giving: Securing Future Donations
Planned giving allows supporters to leave a lasting legacy, ensuring a nonprofit’s mission continues. For example, St. Jude offers bequests that support pediatric research. WWF enables supporters to make legacy gifts that fund conservation. The Nature Conservancy also provides options for planned giving to protect endangered habitats. Similarly, American Red Cross offers legacy gifts for health and disaster relief, while Habitat for Humanity encourages planned giving to fund affordable housing. These gifts provide nonprofits with future financial stability and support mission longevity.
Maintaining the Nonprofit 501(c)(3) Status
Maintaining 501(c)(3) status is essential for nonprofits in the U.S. as it grants them tax-exempt status and allows donors to make tax-deductible contributions. This status not only makes nonprofits more attractive to potential donors but also ensures compliance with federal regulations for tax exemption.
Losing 501(c)(3) status can lead to serious consequences, including the loss of both federal and state tax exemptions, which could significantly impact a nonprofit’s reputation and ability to secure funding. Nonprofits must adhere to IRS guidelines to retain this status, including restrictions on political activities, unrelated business income, and operational transparency. For further details on 501(c)(3) requirements, visit the IRS 501(c)(3) Compliance Guide.
Compliance Requirements for 501(c)(3) Nonprofits
To maintain 501(c)(3) status, nonprofits must meet specific IRS requirements, ensuring their activities align with the organization’s exempt purpose. This compliance protects the organization’s tax-exempt status and strengthens credibility with donors. By following these guidelines, nonprofits can focus on their mission while benefiting from tax-deductible contributions and exemptions.
- Purpose Alignment: Nonprofits must ensure that all activities align with charitable, educational, religious, or scientific purposes as specified in IRS Publication 557. An organization focused on environmental conservation, for example, should ensure its programs directly support this cause, rather than diverting into unrelated activities. Misalignment may result in the loss of tax-exempt status, affecting both financial standing and donor trust.
- Lobbying and Political Campaigning: Nonprofits with 501(c)(3) status are restricted from substantial lobbying or political campaigning, as these could risk their tax-exempt status. Limited lobbying is permitted, but excessive efforts to influence legislation or endorsing political candidates is prohibited. Nonprofits should adopt clear internal policies, especially during election periods, to avoid unintentional violations.
- Unrelated Business Income (UBI): Nonprofits are permitted to earn income from unrelated business activities if this income is managed and reported accurately. Unrelated Business Income (UBI) refers to income from activities not substantially related to the nonprofit’s primary purpose. While allowed, UBI must be reported, and taxes may be required if income surpasses IRS thresholds. Excessive UBI can lead to scrutiny and may risk the nonprofit’s tax-exempt status if unrelated activities become predominant.
- Record-Keeping and Financial Reporting: Transparent record-keeping and annual financial reporting are critical for 501(c)(3) organizations. The IRS mandates the submission of IRS Form 990, which details financials like revenue, expenses, and salaries of key employees. Filing Form 990 annually helps nonprofits demonstrate accountability, building trust with donors and stakeholders by showing a commitment to responsible management. Failure to file Form 990 for three consecutive years leads to automatic revocation of tax-exempt status.
By adhering to these compliance guidelines, nonprofits safeguard their 501(c)(3) status, maintain tax benefits, and present a transparent image to the public. Following these regulations helps nonprofits remain eligible for donations and grants, allowing them to focus on their mission with the financial support they need.
How Are Nonprofit Staff Employees Paid
Nonprofits pay their staff based on available funds, aiming to provide fair compensation while remaining mission-focused. Salaries are typically aligned with the organization’s financial health and ethical standards. Many nonprofits prioritize transparent spending to ensure that a significant portion of their budget goes directly to programs rather than overhead. Compensation policies are often designed to strike a balance—providing fair wages that help retain qualified employees without compromising the organization’s financial commitments to its mission.
Nonprofits can generate surplus funds to support future projects, but these funds must be used in ways that align with the organization’s mission and adhere to IRS guidelines. For 501(c)(3) nonprofits, any profit must be reinvested back into the organization rather than distributed to individuals. Tax-exempt status allows nonprofits to avoid federal income taxes on mission-related income, but they must be cautious with any unrelated business income (UBI), as it may be subject to taxes. Proper financial management, including regular audits and careful allocation of funds, ensures compliance with tax regulations and supports sustainable growth.
Creating a Sustainable Revenue Plan
Developing a sustainable revenue plan is essential for a nonprofit’s long-term success, ensuring that the organization can meet its goals while remaining financially resilient. By diversifying funding sources and adapting to changing conditions, nonprofits reduce reliance on any single revenue stream, making them more capable of weathering economic challenges.
- Diversify Funding Sources: A well-rounded revenue mix strengthens a nonprofit’s financial stability. By securing funds from multiple sources—such as grants, individual donations, corporate sponsorships, and earned income—nonprofits reduce dependency on one source and create a more reliable financial base.
- Adopt Digital Fundraising: Digital fundraising platforms, including social media and online donation portals, expand a nonprofit’s reach by making it easier for people to contribute from anywhere. Smaller, recurring donations through platforms like Classy or GoFundMe Charity can build up over time and provide a steady flow of income.
- Organize Community Events: Hosting in-person or virtual events, such as galas, auctions, or charity runs, can both raise funds and foster a strong community of supporters. These events offer nonprofits a chance to engage directly with their donors, share their mission, and create meaningful connections, encouraging future contributions.
- Pursue Grants and Corporate Partnerships: Nonprofits can apply for grants from foundations and government sources that align with their mission. Developing corporate partnerships can also provide additional funding and visibility within specific sectors. For example, companies may offer financial sponsorships, in-kind support, or matching gift programs.
- Regularly Review and Adapt the Plan: A revenue plan should be assessed periodically to ensure it aligns with current needs and economic conditions. By reviewing and adjusting the plan as needed, nonprofits can stay proactive in managing their finances and remain prepared for both opportunities and challenges that may arise.
Tools and Resources to Boost Financial Health
Financial health is fundamental to a nonprofit’s success, as it ensures the organization has the resources it needs to operate effectively and transparently. Several tools are available to help with budgeting, tracking, and financial planning, making it easier for nonprofits to manage their funds and build trust with donors.
- QuickBooks Nonprofit: QuickBooks offers a version specifically designed for nonprofits, allowing them to track expenses, budget effectively, and create financial reports. With this tool, nonprofits can manage accounting tasks and gain a clearer view of their financial health.
- Bloomerang: Bloomerang is a donor management platform that helps nonprofits track donations, communicate with supporters, and manage donor retention. It provides insights into donor engagement, helping nonprofits build lasting relationships and increase fundraising effectiveness.
- GuideStar: GuideStar is a nonprofit transparency platform where organizations can share financial reports, including IRS Form 990. This tool helps nonprofits increase their visibility to potential funders and demonstrate transparency, building trust with both the public and donors.
- Budgeting Templates: Simple budgeting templates can streamline the process of tracking expenses and projecting costs, helping nonprofits allocate funds efficiently. Many templates are available for free online, providing a starting point for nonprofits new to financial planning.
- Financial Literacy Workshops: Financial literacy workshops offer essential skills in budgeting, compliance, and financial reporting, helping nonprofits improve their financial management. Many workshops are provided by organizations like Nonprofit Finance Fund or Foundation Center, which specialize in nonprofit capacity-building.
Using these tools and resources enables nonprofits to manage their finances with greater precision, ensuring transparency, compliance with IRS regulations, and improved trust among donors and stakeholders.
Key Takeaways About Nonprofit Revenue
A diverse revenue strategy is essential for a nonprofit’s sustainability and impact. By drawing from multiple income sources like grants, donations, community events, and digital fundraising, nonprofits can build a stable financial foundation that withstands economic shifts. Adhering to IRS guidelines, maintaining transparency, and using financial tools for budgeting and donor management help retain tax-exempt status and foster trust with donors.
A flexible revenue plan that adapts to changing needs supports long-term success. Regularly reviewing and updating this plan, and exploring advanced fundraising methods or new tools, can further strengthen financial resilience and impact.
Ready to Transform Your Nonprofit's Financial Future?
A balanced revenue strategy is essential for nonprofits to secure the funding needed to achieve their mission and drive meaningful impact. By diversifying income sources, using financial tools for budgeting and donor management, and adapting to changing needs, your nonprofit can build a solid foundation for growth. Financial planning and transparency help establish trust with donors, positioning your nonprofit for long-term success.
Building financial resilience takes effort and adaptability—explore new strategies, leverage tools, and consider partnerships that strengthen your nonprofit’s financial health. Start creating a sustainable revenue plan today to secure resources and make a lasting difference in your community.
Take the first step by connecting with Charity’s Purse to enhance your fundraising efforts and financial strategy today!
FAQs
1. What are the key revenue sources for nonprofits to secure sustainable funding?
Nonprofits often rely on a mix of revenue sources, including individual donations, grants, corporate sponsorships, earned income from services or products, and fundraising events. Diversifying income sources helps nonprofits reduce financial risk and achieve long-term stability.
2. How can nonprofits ensure compliance when managing revenue from multiple sources?
Nonprofits can maintain compliance by following IRS guidelines, especially for tax-exempt organizations. This includes carefully managing unrelated business income (UBI), accurately reporting funds, and submitting annual financial reports like IRS Form 990. Proper compliance supports tax-exempt status and builds trust with donors.
3. What digital tools can help nonprofits manage their finances effectively?
There are several tools specifically designed for nonprofit financial management, including QuickBooks Nonprofit, Bloomerang, and GuideStar. These tools assist with budgeting, expense tracking, donor management, and financial reporting, all of which enhance financial transparency and efficiency.
4. How can Charity’s Purse support a nonprofit’s fundraising and financial planning efforts?
Charity’s Purse offers resources tailored to nonprofits, such as guidance on creating effective fundraising campaigns, financial management support, and tools to connect with potential donors. This support helps nonprofits strengthen their funding strategies and maximize impact.
5. What are some best practices for creating a sustainable revenue plan for a nonprofit?
A sustainable revenue plan involves diversifying funding sources, using financial tools to manage income and expenses, and regularly reviewing and adapting the plan to address changing needs. Incorporating digital fundraising and community engagement are also effective strategies to support long-term financial health.