How Much Profit Can a Nonprofit Make?
Do nonprofits end the year with a financial surplus? Imagine a charity ending the year with more money than they spent. Unlike regular businesses, nonprofits generate extra funds, called a “surplus.” For example, a food bank might receive more donations than expected and cover their costs with leftover funds. The key difference is what happens to this money—it’s not distributed to owners or shareholders but reinvested into their mission, like expanding food distribution or improving storage facilities. For instance, an educational nonprofit might use surplus funds to develop new programs, or an environmental group might invest in community cleanup initiatives. This article will explore how nonprofits generate extra funds, manage them responsibly, and comply with regulations.
Generating a surplus is crucial for growth, enabling nonprofits to expand their services, invest in staff, and respond to community needs more effectively. A well-managed surplus allows nonprofits to expand services, remain financially stable, and handle challenges more effectively. This article will explore why managing surplus is essential and how it benefits nonprofits in achieving their goals.
Can Nonprofits Make a Profit?
Yes, nonprofits can make a profit. Unlike traditional businesses, where profit benefits owners or investors, nonprofits use surplus funds to further their mission. The key is that while nonprofits generate revenue above expenses, it’s not for personal gain but to support charitable goals. This distinction is critical for understanding nonprofit finance and is governed by regulations such as Section 501(c)(3) of the Internal Revenue Code, which outlines requirements for tax-exempt organizations.
Well-managed nonprofits can create a surplus to grow and innovate. This surplus helps enhance services, expand outreach, and build financial reserves. During economic downturns or reduced funding, a financial cushion ensures continuity of programs and boosts long-term impact.
What Does “Profit” Mean for a Nonprofit?
In nonprofits, “profit” is often called a “surplus.” This surplus represents leftover funds after covering all expenses, indicating financial health. Unlike for-profits, where profits go to shareholders, a nonprofit’s surplus must be used for mission-driven activities, like funding new initiatives, expanding services, or investing in infrastructure.
A surplus shows efficient management and resource use. For instance, a community health nonprofit might use surplus funds to expand a mobile clinic program, allowing them to reach underserved areas. Reinvesting surplus funds can mean expanding outreach programs, enhancing staff skills, or saving for the future. Generating a surplus isn’t about individual gain but securing long-term value for the community.
How Nonprofits Make Money and Profit
Nonprofits generate income from various sources, often resulting in surplus funds. Common sources include donations, grants, program fees, and unrelated business income (UBI). Each source helps nonprofits stay financially sustainable while furthering their mission.
1. Program Fees and Services
Nonprofits earn income through program fees—charging for services aligned with their mission. For example, an educational nonprofit might charge fees for classes to cover costs. Similarly, a community centre might charge a small fee for after-school programs. Program fees help bridge the gap between service delivery costs and available funds. According to IRS guidelines under Section 501(c)(3), income from program fees must be substantially related to the organization’s exempt purpose to maintain tax-exempt status.
These fees help nonprofits maintain services and gain financial independence, reducing reliance on donations or grants. For instance, a healthcare nonprofit might charge minimal fees for wellness check-ups. Fees are typically affordable to ensure access while covering operational costs and supporting sustainability and service quality.
2. Donations and Grants
Donations and grants are essential for many nonprofits. Donations come from individuals, corporations, or fundraisers, while governments or institutions provide grants for specific projects. For example, a nonprofit might receive a corporate donation to fund a local environmental cleanup effort. When managed well, these funds can reinvest a surplus into the organization.
Grants often have restrictions, such as adhering to donor requirements outlined in the Uniform Guidance for federal grants, but careful management can result in leftover funds for future use. For example, a nonprofit receiving a grant for a literacy program might efficiently manage costs and have funds left over to support future activities. Recurring donations also contribute to a surplus that supports growth and sustainability.
3. Unrelated Business Income (UBI)
Unrelated Business Income (UBI) comes from activities unrelated to a nonprofit’s primary mission. For example, a nonprofit might sell merchandise unrelated to its core services to raise funds, like a charity selling branded T-shirts. UBI is taxable and must be managed carefully to avoid losing tax-exempt status. Nonprofits generating UBI must file IRS Form 990-T as required by Sections 511-514 of the Internal Revenue Code.
UBI can be helpful but comes with limitations. For instance, a museum gift shop selling general merchandise must ensure its sales consistently meet its primary mission. The nonprofit risks losing tax-exempt status if too much revenue comes from unrelated activities. It’s essential that UBI activities remain small and do not detract from mission-driven work.
What Happens When a Nonprofit Makes a Profit?
When a nonprofit ends up with a surplus, it must follow specific steps to use these funds appropriately:
- Reinvest to support growth: Surplus funds can be used to grow existing services and reach more people.
- Fund new projects: Launching new initiatives can help further the mission and expand the nonprofit’s impact.
- Strengthen existing programs: Surplus can enhance current programs, making them more effective.
- Ensure IRS compliance: Nonprofits must adhere to IRS rules to maintain tax-exempt status. Proper reinvestment of funds helps ensure compliance and long-term sustainability.
- Expand current programs: Use surplus to scale up successful existing initiatives.
- Create a reserve for emergencies: Building an emergency fund helps the nonprofit respond effectively during crises. For instance, a healthcare nonprofit might use surplus funds to create an emergency reserve for sudden health crises.
- Support training and capacity improvements: Invest in staff training, technology upgrades, or other capacity improvements to enhance overall impact.
Rules and Guidelines for Nonprofits Using Profit
Nonprofits must follow strict rules when using surplus funds to ensure responsible use, alignment with their mission, and transparency.
Board Approval for Surplus Allocation
The board of directors must approve the use of surplus funds to ensure alignment with the mission and prevent misuse. This adds accountability and reassures stakeholders of ethical and focused financial practices.
Funds Must Support Mission Activities
Surplus funds must be used for mission-driven activities—expanding programs, launching initiatives, or improving infrastructure. For example, surplus funds could be used to develop a literacy program or upgrade community health equipment. Every dollar should further the organization’s goals.
Clear Documentation and Reporting
Nonprofits must document and report all expenditures to stakeholders. Transparency builds trust and ensures funds are used effectively. Keeping records also helps assess the impact of spending and optimize strategies.
No Personal Use of Nonprofit Funds
Board members and employees cannot use nonprofit funds for personal expenses. Such misuse is unethical and illegal and can lead to severe consequences, including loss of tax-exempt status. Enforcing these rules helps maintain integrity and donor trust.
Challenges of Managing Surplus Funds
Managing surplus funds presents challenges:
- IRS Compliance: Nonprofits must comply with IRS regulations, manage tax implications, and ensure proper use of surplus funds to avoid audits or losing tax-exempt status.
- Effective Budgeting: Careful budgeting is crucial to allocate funds effectively without causing instability.
- Balancing Savings and Needs: Balancing future and present needs can be tricky.
- Scrutiny Over Surplus: Nonprofits may face scrutiny if they accumulate surplus without a clear plan.
- Clear Stakeholder Communication: Clear communication with stakeholders about saving plans is vital.
- Strategic Planning and Transparency: Strategic planning and transparency are essential.
Key Takeaways on Nonprofit Surplus
Nonprofits aren’t driven by profit like for-profit businesses, which often leads to confusion about whether they can generate a surplus. This confusion stems from the misunderstanding that nonprofits must break even every year, but managing a surplus is key to ensuring growth and sustainability.
- Expanding Services: Surplus funds allow nonprofits to grow their services and reach more people.
- Enhancing Community Impact: Using surplus helps nonprofits improve their positive impact on the community.
- Preparing for Uncertainties: Creating a financial cushion with surplus funds helps nonprofits prepare for future challenges.
- Strict Guidelines and Transparency: Nonprofits use surplus funds responsibly by following explicit rules and ensuring transparency.
- Sources of Surplus: Nonprofits generate surplus through program fees, grants, and unrelated business income.
- Legal Compliance: Adhering to regulatory frameworks is essential to maintain tax-exempt status and use surplus appropriately.
- Resilience and Long-term Impact: Surplus funds are crucial for building resilience and ensuring the nonprofit’s ongoing ability to fulfil its mission.
Get Started on Your Nonprofit’s Marketing Journey With Charity's Purse
Getting your nonprofit’s message out there is crucial for growth and impact. Charity’s Purse offers a free 5-page website to help nonprofits kickstart their marketing journey. This simple yet effective solution enables you to establish an online presence and connect with your audience without a big budget.
By providing you with a professional, easy-to-use website, Charity’s Purse empowers your nonprofit to communicate its mission effectively, attract supporters, and make an impact online.
Let Charity’s Purse be your partner as you take the first steps into digital marketing.
FAQs
Can nonprofits legally make a profit?
Yes, nonprofits can legally make a profit, often called a ‘surplus.’ However, these funds must be reinvested into the organisation’s mission rather than distributed to individuals.
How can nonprofits use extra money?
If their mission aligns with this, nonprofits can use extra money to expand their services, start new projects, invest in infrastructure, or build a financial reserve for future challenges.
Is there a limit to how much a nonprofit can make?
There is no strict limit to how much a nonprofit can make. Still, excessive accumulation without a clear plan may attract scrutiny from regulators, as nonprofits are expected to use their funds to further their mission.
What happens if a nonprofit earns too much?
A nonprofit earning too much without reinvesting appropriately may risk its tax-exempt status. It must demonstrate that its surplus funds are being used for mission-driven activities.
Why do some nonprofits have a lot of money saved up?
Some nonprofits maintain significant savings to ensure financial stability, prepare for emergencies, or fund future projects. This is a strategic way to ensure they can continue operating during reduced funding times.