Nurturing Your Not-for-Profit’s Profit Potential

Despite what the name suggests, not-for-profit (NFP) organizations need to be profitable. As Frank Jakosz, CPA, CGMA, director in CLA’s National Assurance Technical Group and who’s spent more than five decades in public accounting serving NFP clients of all sizes, puts it: “Profitability helps organizations accomplish their missions and sustain themselves.”

While it’s true that NFPs are tax exempt, which helps offset costs, that alone doesn’t lend itself to a sustainable business operating model, points out Scott Steffens, CPA, a former principal for O’Connor Consulting Services LLC (now Aprio): “NFPs can’t exist if they spend more than they take in, so they’re constantly asking, ‘What can we do to make more and spend less?’”

Diversifying Revenue

One way profit-minded NFPs boost revenue is through diversification, Jakosz says: “This is going to be driven by an organization’s type and mission, but I always think of diversification as an investment strategy to manage risk. You’re diversifying funding so you’re not reliant on too few sources.”

Similarly, Steffens encourages NFPs to diversify how their spaces are used as revenue generators whenever possible. He points to how museums of all types and sizes have sought new revenues. “Museums have almost forever operated under the traditional business model of relying on student groups, memberships, and rotating exhibits for funding,” Steffens says. “Now, more are focusing on larger, flashier rotating exhibits, and they’ve begun hosting special events—weddings, corporate meals, concerts, and conventions within their spaces—to bring people in. That’s harder for social service organizations to do, but it’s an example of leveraging what you do against what you have to work with.”

Dorri McWhorter, CPA, CGMA, CIA, MBA, president and CEO of the Executives’ Club of Chicago and former president and CEO of the YMCA of Metropolitan Chicago, thinks similarly, stressing that it’s important for NFP organizations to understand their value propositions and leverage their resources: “Ask what other things you can leverage and make money on. Think of what you do so well, or services you could provide, that could earn new revenue for the organization.”

She outlines four buckets of potential revenue NFPs should consider:

• Consumer-Driven Initiatives: Memberships, program fees, cause marketing, rentals, community partnerships, and retail.
• Philanthropy: Contributions from individuals, foundations, and grants received.
• Government Partnerships: Contracts, capital grants, and appropriations.
• Business Opportunities: Facilities management, workforce training, back-office support, and space and asset rentals.

As an example, McWhorter describes her experience at the YMCA and how the organization diversified its swimming program to turn one revenue source into three.

• Revenue Source One: Consumers pay to participate in swimming instruction programs.
• Revenue Source Two: The YMCA categorized the swim lessons as workforce development because participants earn lifeguard and instructor credentials to use in water-based careers. That effort drew in government funding.
• Revenue Source Three: A corporation passionate about water conservation and teaching people to swim offered a grant to support teaching more people to swim.

Overall, as you consider revenue diversification, McWhorter says it’s important to know your audience, your partners, and how you’ll pivot: “Understand the process and any tweaks you may need to make to get into other revenue streams. For example, with our swimming program, the activity never changed. We just made that swim lesson more relevant to additional revenue sources.”

Analyzing Costs and Risks

Another key component to an NFP’s profitability is its fee and cost recovery efforts. “Any fees charged should be reviewed to ensure they’re commensurate with the cost of delivery,” Steffens stresses. “Organizations need to ensure they’re capturing those costs properly and not missing opportunities to recover them. Profitability isn’t only about looking for new revenue but also asking if they’re getting reimbursed properly.”

As part of the cost recovery process, Steffens suggests reviewing all contracts so you understand what costs can be passed through. “Pay attention to inflationary escalators,” he warns. “When possible, recapture those as part of any agreements.” He offers the example of food banks that might need to supplement donations to round out meals because of the higher cost on eggs: “If those prices increase, you have to balance out what’s being donated, which adds to out-of-pocket costs that weren’t anticipated a year ago.”

In terms of risk, Steffens says it’s vital to understand what might happen if a current revenue source was dramatically reduced or went away entirely. “How would you fund your programs?” he asks. “So, before you think about new revenue, protect what you have. It’s important to understand your alternatives for maintaining revenue if there are changes.”

For NFPs that find themselves needing quick cash, Steffens says a cost and risk analysis will help determine appropriate options. For example, you might discover assets, such as excess or unused property or equipment, that the organization could convert to funds. “These are one-time transactions but they’re examples of things that could be monetized to bridge a funding gap without jeopardizing the ability to fulfill your mission,” he says.

Communicating Your Needs

Of course, a NFP’s profitability also stems from donations. Experts suggest not shying away from communicating to existing and potential donors on the many ways they can give to your NFP.

“An increasing number of individuals have set up donor-advised funds to make gifts and grants,” Steffens shares. “The simple act of promoting the willingness to accept gifts from individuals, foundations, corporations, and donor-advised funds can bring in new funding. Be aware of all the gift sources out there.”

Notably, gifts from donors don’t always have to be grand gestures—be open to an increased number of smaller gifts that may one day lead to larger gifts. Steffens notes that a big part of growing your donor base is establishing relationships: “Provide opportunities for donors to come to an event—get them excited about your programming. Maybe $1,000 becomes $10,000, and then you become part of an estate plan.”

Investing Wisely

Investment returns also offer sustaining income to NFP organizations over the long haul and through difficult times. However, Jakosz warns that all investments involve risks that must be mitigated. He suggests adopting a sound investment policy and approach that considers the organization’s short- and long-term needs and objectives, creates a spending policy, reflects the organization’s risk tolerance, and is appropriately diversified.

Importantly, determining what to invest in requires a lot of consideration, and Jakosz advises organizations to seek advice from a reputable investment manager that specializes in serving NFPs.

As the finance manager for the Pritzker Military Museum and Library, Lisa Sloan says the organization is doing just that. When the museum was founded, it drew funding simply because of its name. However, for the long term, Sloan stresses that ongoing support is needed from external sources: “We have to think outside the box to creatively and strategically build sustainability.”

As a result, the museum began investing as it worked to fund its mission. Sloan emphasizes that, first and foremost, the internal audit process ensures donor funding is safeguarded throughout the investment process. “You can’t just go off to the races with donors’ money,” she points out. “We must ensure the funds are used correctly and provide full transparency.”

The museum’s investments include a mix of short- and long-term index and private equity funds held through large banks. “We use a professional services firm to guide us,” Sloan says, emphasizing the importance of carefully screening any firm they’ll be working with. “We lean heavily on our advisors’ expertise.”

Sloan offers some additional tips:

• Ensure that the investment process is part of your strategic plan.
• Have patience. “Getting into alternative investments doesn’t happen overnight, and it’s not a decision to take lightly,” she says. “This is a very personalized decision and process.”
• Proceed with caution, and don’t risk what you can’t afford to lose.

Mission-Aligned Investing

In 1938, Mary R. Shedd, wife of John Shedd, founder of Chicago’s Shedd Aquarium, had the foresight to create an endowment to ensure the aquarium’s future.

Since then, the endowment has continued to grow, and Gary Gordon, the aquarium’s chief financial and administrative officer, says today’s goal is to protect against unknown risks while looking at diversified long-term revenue.

Gordon says the aquarium already had a history of successfully investing its resources, but the organization sought to better align its investment strategy with its conservation mission. That goal led to the creation of a $19 million portfolio, funded with Shedd resources and bolstered by a 2022 contribution from Builders Initiative, that would target investments in several sustainability-focused funds.

Prior to the creation of the portfolio, the Shedd Aquarium’s team studied existing sustainable investing frameworks used by other organizations before asking their investment partner to establish a fund based on seven goals the team identified. “We followed a well-established framework focused specifically on the environmental elements,” Gordon says. The investment vehicles include sustainable private equity investments that he expects will generate returns as strong as other private equity investments.

The aquarium’s new portfolio aligns capital resources with investment opportunities focused on urgent areas, such as aquaculture and ocean health, renewable energy and storage, emissions reductions, sustainable agriculture and land use, and water quality and management.

Gordon describes the environmentally invested fund as serving a double bottom line: “We’re making conservation-aligned investments and using those proceeds to support our conservation mission.”

Additionally, Gordon notes that having a knowledgeable investment partner has been critical to the process: “We told them what we wanted to do, and then they handled the how.”

Today, the Shedd Aquarium is making it a point to share their process and knowledge with others. “The idea of aligning investing with the mission wasn’t new, but it was new to us,” Gordon says. “Hopefully other organizations can learn from our double alignment of investing in what we believe in and then using those returns to further our missions.”

Operating in Uncertain Times

Like any business, NFPs need to adapt their profit strategies during times of uncertainty, especially when political uncertainty is involved. For example, McWhorter says NFPs should know if their federal funds flow through the state and then to the organization, as this may change their communication approach with different political parties.

Although there’s a perception that one political party spends and the other doesn’t, McWhorter points out that, ultimately, both parties spend—just in different buckets—so it’s important to know your audience so you can repackage and market your programs accordingly: “For one political party’s administration, you might want to describe how you support families. If it’s a different political party’s administration, you might want to emphasize growing business opportunities.”

Similarly, Jakosz says NFPs must be mindful of the needs of the communities they operate in: “To stay relevant and make a positive impact, organizations must grow with new services that address new missions. Connect with people outside of the NFP world, including with local and regional officials, to ask what they might need down the road.”

Further, Steffens reminds NFPs to research what’s happening at the IRS and know the parameters around giving: “When the tax code was simplified with the larger standard deduction, it meant fewer deductions for charitable giving. That impact on taxpayer behavior is important.”

Networking Intentionally

The future of NFP revenue hinges on how next-gen givers make contributions. Steffens recommends exploring how tools like social media might come into play for giving: “We’re familiar with influencers promoting brands; are there opportunities to utilize influencers to promote the charitable aspects of your organization? The future of giving isn’t through blanket snail mail campaigns—it’s through providing ample opportunities to make those gifts.”

Jakosz reminds NFPs to keep in touch with investment advisors, bankers, and attorneys, and even consider having these professionals on their boards.

Importantly, McWhorter reminds that certified public accountants (CPAs) are uniquely qualified to help NFPs understand the variety of resources out there and how to access them: “Understanding the differences in how private and government funding flows and how it’ll impact the organization is critical. CPAs can help with that.”

As Sloan says, “Having the right individuals in place is a pathway to resilience, growth, and long-term impact.”

Overall, she says the keys to sustaining your NFP are being open to change and new ideas, diversifying support, and understanding your financial strategy: “Remain responsive to the challenges around you so you’re able to service your mission, not just today, but for tomorrow.”

Natalie Rooney is a freelance writer based in Eagle, Colo. A former vice president of communications for the Ohio Society of CPAs, she has been writing for state CPA societies for more than 20 years.

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