Discussion Post BUSI 409 Non Profit Management hw.pdf

In Module/Week 5, we cover Chapters 12–15, which deal with obtaining and managing

resources for the non-profit organization. Think of a non-profit organization you are familiar

with. If you are not familiar with one, please become familiar with one in order to complete

this assignment in a professional and informed manner. In terms of the chapters we covered,

what do you consider to be the 3 most important concepts that the organization should

consider? Include in your answer:

1. The concepts

2. Page numbers where the concepts may be located

3. A brief definition of the concepts

4. How the organization would benefit from considering the concepts you have chosen

5. How the application of the topic reflects God’s purpose or design

Your thread of at least 500 words and in APA format.

*****I added all chapters in the attachments of this question.*****

12 Financial Management 
Chapter Outline 
 Definitions of Key Concepts 
 Overview of Nonprofit and Personal Finances 
 Nonprofit Financial Statements 
o Statement of Financial Position 
o Statement of Activities 
o Statement of Cash Flows 
o Statement of Functional Expenses 
 Using Financial Ratios 
 Managing Endowment Funds 
 Developing and Managing the Budget 
 Risk Management, Financial Policies, and Controls 
 Chapter Summary 
 Notes 
 
The principal financial challenge for most nonprofit organizations is to generate sufficient and 
reliable revenue to meet short-term operating costs and long-term capital needs. 
Photo: Thinkstock/Comstock/Thinkstock 
Learning Objectives 
After reading this chapter, students should be able to: 
1. Define key terms and concepts in nonprofit financial management. 
2. Explain financial statements developed by nonprofit organizations. 
3. Summarize key financial ratios used in financial management of nonprofit organizations. 
4. Explain principles of managing endowment funds. 
5. Describe concepts related to developing and managing nonprofit budgets. 
6. Identify circumstances that pose risks to nonprofit organizations. 
7. Analyze cases, applying concepts from the chapter. 
As emphasized before, nonprofit organizations do not measure their success exclusively or 
primarily by their financial results but rather by outcomes related to their missions or by a double 
bottom line that considers both financial and program results. That being the case, however, it is 
the reality that many boards and CEOs pay particular attention to their organizations’ financial 
condition. Without adequate and well-managed resources, achievement of the mission is 
jeopardized, and the very survival of the organization may be threatened. 

It is realistic to acknowledge that an organization may be of only mediocre effectiveness and still

continue to survive for a long time without facing a crisis. But budget deficits or the erosion of

financial assets are likely to gain the focused attention of the board and CEO and require

immediate action. Many nonprofit board members are drawn from the business community and

may be more familiar, or more comfortable, with financial concepts than with the professional

fields of the organization’s staff, so they often focus their attention on the budget and financial

statements. In addition, conservation of the nonprofit’s assets is an essential part of the board’s

fiduciary responsibility, and any signs of trouble are likely to be addressed urgently. Few events

can so quickly place a nonprofit CEO’s tenure in jeopardy as an operating deficit, financial

mismanagement, or a bad audit report. In sum, financial skills are necessary, even if not

sufficient, for effective nonprofit management. This chapter considers some basic concepts in

nonprofit financial management and accounting. The following chapters in this section discuss

three principal sources of nonprofit revenue in more detail, including philanthropic gifts, earned

income, and government grants and contracts.

Some readers may have familiarity with the vocabulary of financial management, accounting,

and financial statements. If so, they are encouraged to read this chapter for a refresher and

perhaps a perspective on how concepts familiar to them from the business sector apply to

nonprofit organizations. Others may not have studied finance before, but a background is not

presumed here, so they should not be concerned about approaching this topic. Let’s start by

defining some essential terms and concepts.

Definitions of Key Concepts

It is important to clarify the differences among the concepts of bookkeeping, accounting, and

financial management. Bookkeeping refers to the methods and systems by which financial

transactions are recorded. This chapter does not discuss nonprofit bookkeeping, but various

manuals and other materials are readily available on this subject. Accounting encompasses the

rules by which financial transactions are classified and reported. This chapter does not provide a

detailed guide to nonprofit accounting but introduces some basic principles and concepts. Other

readings suggested at the end of the chapter will be helpful for those who may wish to have a

deeper understanding of accounting.

There are two types of accounting. Financial accounting “deals with the financial information

published for use by parties outside the organization.” Managerial accounting “deals with

information that is useful to an organization’s managers,” but is not required to be made

available to others (Anthony & Young, 2005, p. 466). For example, a banker considering a loan

to a nonprofit would need to see financial accounting statements but might not be concerned

about how much it costs per client to run each of the organization’s programs, which is

managerial accounting data. The latter, however, might be important information for a CEO to

have when planning budget allocations.

Financial management is a broader concept than accounting. It relies on accounting statements

for data, but it “focuses on the meaning [italics original] of those figures” (Anthony & Young,

2005, p. 487). Financial management usually involves the analysis of various financial ratios that

may provide indicators of trends and the organization’s financial health. Thus, the key in

bookkeeping is accuracy; in accounting, consistency and following the rules; and in financial

management, making judgments and establishing policies to guide the organization’s financial

life.

The principal financial challenge for most nonprofit organizations is to generate sufficient and

reliable revenue to meet their short-term operating costs and long-term capital needs. Nonprofit

organizations seek various sources of revenue, including philanthropic giving, earned income,

and government grants and contracts. Sound financial management includes maintaining an

appropriate balance among these sources of revenue. In determining the ideal mix, managers

consider their sustainability over time, the compatibility of funding sources with mission, and the

extent to which some types of funding may be able to catalyze funds from other sources (Kearns,

Bell, Deem, & McShane, 2014).

In offering a unified theory of nonprofit finance, Dennis Young (2007) suggests that the sources

realistically available to a given organization will reflect the benefits it provides through its

programs and services. For example, an organization that provides private goods can likely rely

on earned income, since the individuals who benefit will be willing to pay. Those that produce

public goods may be able to justify support from government. Nonprofits that provide programs

that benefit some group—that is, more than an individual but less than the public (similar to

Lohmann’s concept of common goods, discussed in Chapter 3)—may attract gifts from those

who share an interest in their work. A nonprofit also may generate revenue by providing what

Young (2007) calls trade benefits—for example, the value it provides to a partnership with

another nonprofit or a corporation. Other organizations will have endowmentfunds, usually

provided through gifts from individuals, which produce annual investment income to supplement

funds available through other sources.

A well-managed organization will strive to achieve diverse revenue sources, both to minimize

risk and to maximize its autonomy, that is, to avoid a follow-the-money approach in which its

programs evolve in response to trends in government or foundation grants or the interests of

major individual donors. Identifying an ideal and realistic income mix is thus one of the principal

financial decisions for any organization. Young (2007) proposes the following approach:

 Start with a service portfolio that addresses mission.

 Analyze the nature of benefits conferred by these services.

 Seek income support from alternative sources in proportion with the mix of benefits.

Justify resource solicitations as a quid pro quo for benefits provided. Avoid a tin cup

mentality, that is, the feeling that you are begging for support.

 Make adjustments to the income portfolio to reflect feasibility factors, which may inhibit

or enhance the collection of each sought form of income.

 Make adjustments to the income portfolio to reflect opportunities and problems

associated with interactions among alternative income streams.

 Make adjustments to the income portfolio to ensure fiscal integrity and maximum

mission impact. This may require adjustments in the service mix, particularly the balance

between profitable and loss-making activity.

 Make adjustments to the income portfolio to account for risk. This may require adding

additional income streams such as investment income from endowments, further

diversifying the overall income mix so that it is less concentrated on a few sources, and

cultivating more deeply certain income sources that show promise of stabilization

through the building of trust (p. 370).

Overview of Nonprofit and Personal Finances

Organizational finance may be unfamiliar to some individuals, but most of us have at least some

understanding of how we manage our own assets and accounts. Thus, let’s begin by looking at

the types of funds that nonprofits manage and how they are like—or unlike—an individual’s

personal finances (Table 12.1). It will be necessary to oversimplify some ideas initially, but a

number of more complex issues will be introduced later on in our discussion.

A nonprofit’s operating funds are much like those each of us manages in his or her checking

account. In general, payments received are intended to be spent within the same period to pay

current bills. Expenses may be limited by a budget, although both individuals and organizations

also have the ability to borrow funds to meet current obligations, with obvious risks in both

cases. Operating income—that is, the funds that flow into your checking account or the

nonprofit’s operating accounts—may be unrestricted or restricted. Fees that nonprofits receive

for services provided to customers or clients, gifts from donors who do not designate a specific

use, and revenue from earned income activities are usually unrestricted, which means they may

be used to meet any expense, including, for example, the salaries of staff, rent and utility bills, or

capacity-building activities. An individual’s salary is generally unrestricted income, too; that is,

nobody tells you how to spend the money.

But suppose your grandmother gives you a check (and grandmothers may still write checks!) for

your birthday, directing that you use the money to buy a new overcoat for the winter. You might

deposit her check in your checking account, but you would need to somehow keep that money

separate, at least in your mind, because it has been restricted to a specific use. Nonprofits also

receive payments that are designated for particular purposes and likewise need to ensure that

they are spent accordingly. Your responsibility to follow your grandmother’s direction may be

only a moral obligation, while nonprofits are legally required to adhere to the purposes attached

to restricted funds. (Of course, both you and the nonprofit may also have the concern that a

donor, or grandmother, could decide not to give again if the money is not properly applied.)

A nonprofit’s operating funds that are temporarily restricted could represent, for example, an

advance payment on a grant or contract to cover some service that it has not yet performed. The

organization has not yet incurred the expenses that the payment was intended to cover, and the

money must be set aside until it has. The funds are restricted until such a time that the work has

been completed and the revenue actually earned. Or the organization may have received a gift

that is to be used for the purchase of a new item of equipment. The money is restricted until the

item is purchased; it cannot be used for something else, just as you cannot use the money from

your grandmother for a new iPad.

Most of us count on our weekly or monthly income to cover our expenses but recognize that

something could go wrong. An unexpected car repair bill could arise that was not in the budget.

Summer jobs may turn out to be in short supply this year, eliminating some of the additional

income you had anticipated earning toward fall semester expenses. Knowing these risks, we

might accumulate some money in a savings account, something we can turn to for the proverbial

“rainy day.” Organizations also establish rainy day funds, or operating reserves, to be available

under similar circumstances. The existence of such reserves, often equivalent to six months or

one year of the operating budget, is one hallmark of a soundly managed organization. Like your

personal savings, operating reserves are generally invested in very secure, short-term instruments

such as bank certificates of deposit or money market funds. As with your personal savings, there

may be the hope that reserves will not need to be touched, but it is important that they be

preserved and kept liquid in case they are needed.

The analogy between individual and organizational funds breaks down a little when we talk

about endowment, for one reason in particular—individuals are mortal, but organizations and

institutions are not necessarily so! Many endowments are funds that are not intended to be

spent—ever. The investment income that they generate may be expended for current operating

expenses, but the principal is often preserved in perpetuity. No individual has a need for funds of

such a permanent nature.

There are two basic categories of endowment funds: board-designated endowment (also called

quasi endowment) and permanent endowment (also called pure endowment).1 Board-designated

endowment includes, as the term suggests, money that the organization’s board has decided to

invest as an endowment. For example, maybe the organization has run an operating surplus for a

while and has accumulated more operating reserves than it really needs. The money is not

earning much interest in the safe bank account where it is being kept, and it seems unlikely that

the organization will need to draw on its reserves, at least not all of them, for the foreseeable

future. The board decides that some of that excess should be invested and preserved over the

long term to provide additional income to support or enhance the organization’s programs in

future years. Its purpose might be to build up an independent source of annual income as a way

to diversify revenue sources, enable the organization to sustain and enhance its programs, and

gain more independence from traditional funding sources. Because its time horizon is long, and it

does not foresee needing to tap the principal, the board likely would invest those funds in stocks,

bonds, real estate, and other classes of assets, willing to ride out short-term fluctuations in order

to gain greater investment returns over the long haul.

Since it was the board’s decision to place funds into board-designated or quasi endowment, the

board has the authority to withdraw the money from that type of endowment if it determines that

to be necessary or desirable. But that is not a decision that the board is going to make lightly.

Just as you would not be quick to cash out your IRA (individual retirement account) to pay for

lunch, or even to buy a new car, a board’s decision to take funds out of board-designated

endowment is not one that it would make except to meet some special need, for example, to

build a badly needed new facility or some similar purpose that represents a major and long-

lasting improvement.2 Again, although they show up as unrestricted funds on financial

statements, quasi-endowment funds should not be regarded the same as operating reserves; they

are investments for the long term.

With permanent or pure endowment, the board has limited or no flexibility. These are funds

given by donors who specified that the principal be retained and be invested in

perpetuity, meaning forever. They are permanently restricted.Donors may also have designated

that annual income generated through the investment of endowment principal be used for certain

purposes, for example, to provide scholarships to students or to maintain a chair for a violinist in

the symphony orchestra. Under most circumstances, the board does not have the legal authority

to invade the original principal of the gift or to use the income for purposes not consistent with

the donor’s direction without first obtaining the donor’s approval or, with strong justification,

permission from a court of law.3

In looking at your personal finances, the closest thing that you may have to endowment funds are

the resources you or your employer have placed into retirement accounts, perhaps a 401(k), a

403(b), or an IRA. These assets are not intended to be spent today or anytime soon and, indeed,

the law may place significant barriers to your gaining access to the money now. They are like

board-designated or quasi endowment; you might be able to withdraw the funds, but that is not

your intention or plan, except under highly unusual circumstances. Obviously, there is a big

difference between your retirement funds and a nonprofit’s permanent endowment, since you

probably intend to spend your retirement funds eventually to support yourself once you reach a

more advanced age and end your career. A nonprofit’s permanent endowment is

intended never to be spent. There is nothing quite comparable to “in perpetuity” for an

individual.

In addition to financial assets, organizations—and individuals—have physical assets. Like an

individual or a family, nonprofits own buildings, vehicles, equipment, and other things. (Physical

assets are not depicted in Table 12.1.) Physical assets are quite different from money. For one

thing, they are generally illiquid, meaning that they are not easy to sell. It is also often difficult to

know exactly how much they are worth. For these reasons, they do not serve the same purpose as

operating funds or reserves. They also are not the same as endowment because they generally do

not generate income that might be used to meet current expenses. It could be possible, of course,

to sell the car or the house if needed to pay bills, but that would reflect a relatively dire and

undesirable situation for an individual or an organization.

Before looking at nonprofit financial statements, let’s consider how two additional principles of

accounting may be understood in terms of both an organization’s and an individual’s finances:

the distinction between the cash basis of accounting and the accrual basis of accounting and the

concept of cash flow. Using the cash basis, financial transactions are recorded only when money

changes hands. This is the way many of us handle our checking accounts; we add to the balance

when we make a deposit and subtract when we withdraw funds. But using a cash basis can

provide a misleading picture of one’s actual financial situation; for example, it ignores the

purchases that have been placed on a credit card. The amount of those purchases may not yet

have hit your checking account, but they should be subtracted from its balance—at least in your

mind—to gain an accurate sense of where you stand. The credit card is an account

payable (meaning the charges are owed but not yet paid). On the other hand, let’s say you have

sold something on eBay and are awaiting the payment to clear your PayPal account. The money

is not reflected in your checking account balance, but you can plan your expenses in anticipation

of receiving it, since it is on the way. It is an account receivable, and it needs to be taken into

account in assessing your current position.

A nonprofit organization faces similar situations. For example, it may have sent bills to clients

for services that it has provided, or it may have pledges from donors that have not yet been

received. Those are accounts receivable and need to be taken into consideration along with the

cash it has in the bank, since they represent money that it has earned or is entitled to receive.

Alternatively, a nonprofit may receive payment on a grant or contract for services that it is going

to provide in the future. It has received the cash, but it hasn’t yet earned it, and it has future

expenses to which it is obligated as a result of the terms of the grant or contract. It cannot look at

that cash as money available to pay for salaries, rent, or the electric bill. The cash basis of

accounting thus presents some drawbacks. As John Zietlow, Jo Ann Hankin, and Alan Seidner

(2007) explain,

In cash basis accounting, revenues are recorded when cash comes in and expenses are recorded

when cash is expended. The problem is that revenues and expenditures are not properly matched

during the year. This mismatch becomes serious whenever your organization has [a] significant

dollar amount of payables, receivables, inventories, or depreciable assets. (p. 171)

Accounting on an accrual basis takes into account the money that a nonprofit has earned and is

entitled to receive, as well as obligations for expenditures that it has not yet incurred. It thus

presents a much more accurate portrayal of the nonprofit’s actual situation than cash basis

accounting and, indeed, is mandated for external financial reporting.

But the accrual basis of accounting also may lead to a misleading picture. For example, suppose

your friend has a wealthy aunt who has promised to leave her entire large estate to him when she

dies. He may think of himself as wealthy already; he has mentally recorded his inheritance as a

receivable. But every time you are out together, he needs to borrow money from you to pay for

dinner. He is thinking on an accrual basis, but unfortunately, he does not have sufficient cash

flow right now to meet his living needs. A nonprofit organization could be in the same situation.

For example, it may have landed some lucrative contracts, but it has not yet received payment.

Using the accrual basis of accounting, the anticipated payment shows up as revenue on its

financial reports. But it may not have cash on hand in the bank to meet this month’s rent or

payroll. For these reasons, organizations—and individuals—also need to track cash flow. We

will see more about how they do so in the next section of this chapter.

Nonprofit Financial Statements

Again, accounting is about following the rules. For nonprofit organizations, rules are established

by the Financial Accounting Standards Board (FASB), which people often pronounce as “Faz-

bee,” which defines generally accepted accounting principles (called GAAP). The standards

especially relevant to nonprofit organizations are No. 93 (“Accounting for Depreciation”), No.

95 (“Statement of Cash Flows”), No. 116 (“Accounting for Contributions Received and

Contributions Made”), No. 117 (“Financial Statements of Not-for-Profit Organizations”), and

No. 124 (“Accounting for Certain Investments Held by Not-for-Profit Organizations”) (Anthony

& Young, 2005, p. 469). We will not go into detail on all these in this discussion, but there will

be occasions to refer in particular to the Statement of Financial Accounting Standards (SFAS)

No. 116 and SFAS No. 117. These standards have ramifications not only for how nonprofits

keep track of their finances, but also for their relationships with donors. FASB regularly reviews

its standards, and students are encouraged to check its website (www.fasb.org) to see if any

changes have been made subsequent to the writing of this text.

Tables 12.2, 12.3, 12.4, and 12.5, respectively, provide examples of four financial statements that 
nonprofit organizations prepare: (1) statement of financial position (sometimes called 
the balance sheet), (2) statement of activities (sometimes called the income 
statement), (3) statement of cash flows, and (4) statement of functional expenses. All of the data 
in these statements, which are often included in organizations’ annual reports and websites, also 
are reported on Form 990, in a somewhat different format. Space does not permit a line-by-line 
discussion of the statements, so let’s just look at a few key items, especially those that illustrate 
unique features of nonprofit accounting. 
 
Source: Big Brothers and Big Sisters of Massachusetts Bay, Inc. Retrieved January 21, 2015, 
fromhttp://www.bbbsmb.org/site/c.9gKMJZMxF7LUG/b.8453153/apps/s/content.asp?ct=12489953 
 
Source: Big Brothers Big Sisters of Massachusetts Bay, Inc. Retrieved January 21, 2015, 
fromhttp://www.bbbsmb.org/site/c.9gKMJZMxF7LUG/b.8453153/apps/s/content.asp?ct=12489953 
 
Source: Big Brothers Big Sisters of Massachusetts Bay, Inc. Retrieved January 21, 2015, 
fromhttp://www.bbbsmb.org/site/c.9gKMJZMxF7LUG/b.8453153/apps/s/content.asp?ct=12489953 
 
Source: Big Brothers Big Sisters of Massachusetts Bay, Inc. Retrieved January 21, 2015, 
fromhttp://www.bbbsmb.org/site/c.9gKMJZMxF7LUG/b.8453153/apps/s/content.asp?ct=12489953 
The examples in this chapter are the fiscal year 2014 financial statements of Big Brothers Big 
Sisters of Massachusetts Bay (BBBSMB), which serves the Boston area. Its financial statements 
have been taken directly from its audit report, which is posted on its website (www.bbbsmb.org). 
Like many organizations, BBBSMB does its accounting on a fiscal year basis—in its case, the 
year runs from July 1 to June 30—rather than a calendar year ending on December 31. The 
federal government ends its fiscal year on September 30, and some nonprofits that receive 
significant government support also use that date, making it easier to reconcile their accounting 
with required government reports. Much of the same data shown on official financial statements 
are also provided in an organization’s Form 990, which is filed with the Internal Revenue 
Service and is easily accessed through services such as GuideStar. For purposes of space and 
simplicity, the examples shown in this chapter do not include the Notes to the Financial 
Statements, the notes that follow financial statements and provide supplemental information. But 
the notes are an integral part of an organization’s overall financial statements and often 
illuminate some important details. Anyone wishing to have a complete understanding of the 
financial position of BBBSMB, or any nonprofit, should read the full audit report, including the 
auditor’s comments and the notes. But let’s look at just a few key points in BBBSMB’s financial 
statements that relate to some of the principles we discussed above. 
Statement of Financial Position 
The statement of financial position (sometimes called the balance sheet) provides a snapshot of 
the organization at a point in time, usually the end of a fiscal year. It summarizes its assets, that 
is, “the items that the organization possesses, with which it carries out its programs and service,” 

and its liabilities, the “amounts of borrowed money, or debt, that the organization has used to

finance some of those assets” (Zietlow et al., 2007, p. 172). To put it in personal terms again,

your personal assets may include your bank accounts, the book value of your car, and the market

value of your house. They need to be offset by your liabilities, for example, the balances on your

car loan, mortgage, and credit cards. The difference is equal to your personal net worth. In a for-

profit company, the difference is called equity; it represents the value of the owners’ interest in

the firm. For a nonprofit, there is no ownership interest, so the difference between assets and

liabilities is simply defined as net assets. The way balance sheets are constructed, assets always

equal the sum of liabilities and net assets; if these totals do not agree, there is something wrong

with the numbers.

The BBBSMB balance sheet reflects some of the accounting principles discussed before. For

example, notice that net assets (down toward the bottom of the statement) are divided into those

that are unrestricted, those that are temporarily restricted, and those that are permanently

restricted. The temporarily restricted assets are funds that donors intended to be used for specific

activities that have not yet been carried out. (A breakdown of these intended purposes is

provided in Notes to the Financial Statements, which are not shown in this simplified example.)

Permanently restricted assets usually represent endowment.

Under “current assets,” BBBSMB’s balance sheet shows an asset called “contributions

receivable” and another called “grants receivable.” That reflects the accrual basis of accounting;

these are gifts and grants that have been promised but not yet received. The total shown for

contributions receivable usually includes an adjustment for what are called “doubtful accounts,”

which means gifts and grants that may end up not being paid for some reason. That amount is

estimated based on past experience. SFAS 116, which was mentioned earlier, requires that under

certain circumstances nonprofits show pledges (“contributions receivable”) as assets, even if they

have not received payment of the gift. It was a controversial requirement when introduced in the

1990s, which caused some organizations to reconsider how pledges were written and

documented. It was one of the factors that have led to more formal relationships between

nonprofits and their donors over the past decade.

Under “current liabilities” on BBBSMB’s statement of financial position, we see another

example of the accrual basis, accounts payable, which represent commitments that BBBSMB

has made, but which have not yet been paid. The obligations are liabilities that must be shown on

the balance sheet.

Statement of Activities

Now, let’s go to Table 12.3, BBBSMB’s statement of activities. The balance sheet, or statement

of financial position (shown in Table 12.2), is a snapshot of the organization’s finances taken at a

point in time. But the statement of activities shown in Table 12.3 is more like a video that shows

the flow of revenues and expenses of the organization, and the resulting changes in net

assets, over a period of time, generally a fiscal year. Accordingly, some nonprofit organizations

call this the “statement of revenues, expenses, and changes in net assets.” For a business, this

statement would be the same as its “profit and loss,” or “P&L” statement (Zietlow et al., 2007, p.

179).

BBBSMB’s statement of activities shows various sources of revenue, including the net revenue

from events (after expenses related to the events), contributions from private donors, and

government funds. These all would be considered “public support” in determining that

BBBSMB is a public charity rather than a private foundation. (The difference was discussed

in Chapter 2.) All revenues are divided into the categories of “unrestricted,” “temporarily

restricted,” and “permanently restricted.” In 2014, BBBSMB received $4,097,717 in unrestricted

revenue, which could be used to meet its general operating expenses or for any legitimate

purpose determined by its leadership. BBBSMB received $776,997 in revenue that was

temporarily restricted. That means the donor or grantor has specified that the funds be used for

some specific purpose or program and they cannot be expended until those activities occur;

perhaps the work is scheduled for some time in the next year. At the same time, there were “net

assets released from restrictions,” totaling $2,020,587, either because a time restriction expired

or because the organization provided the services that the funds were intended to cover. This

point can be a little difficult to understand, but Bowman (2011) provides a helpful example:

Assume that a not-for-profit theater sells season subscriptions for a series of five plays [and the

buyers pay cash]. Before the season begins, none of the cash can be recognized as revenue

because the theater has not yet earned it. Subscription sales go on the statement of financial

position [the balance sheet] as cash, and the theater’s accountants balance it by creating an equal

amount of deferred revenue as an offsetting liability. Since net assets do not change, there is no

revenue recognized at this time. It should be easy to see why cash received before being earned

is a liability: If the theater cancels the season, it must refund the cash to its patrons. After each

performance, deferred revenue is reduced by one-fifth, which increases net assets, causing

recognition of one-fifth of the cash as revenue. (p. 22)

Gifts that are permanently restricted are generally for endowment; BBBSMB received $15,000

that was permanently restricted in 2014. And it received a $90,000 appropriation from

endowment funds to be applied to its 2014 operating budget. (Management of endowment funds

is discussed further in a later section of this chapter.)

Statement of Cash Flows

Table 12.4 shows BBBSMB’s statement of cash flows for 2014. As discussed previously, the

statement of activities does not give the whole picture because of the accrual basis of accounting

it reflects. (Remember your friend who never had any cash but thought himself wealthy because

of his anticipation of future funds from his aunt.) For that reason, SFAS 117 requires that

nonprofits also produce a statement of cash flows to show cash inflows and outflows over the

year, enabling us to see how the cash amount changed from one year to the next. There are two

methods of presenting cash flow, direct and indirect, but this chapter does not go into detail

about them (McMillan, 2003a).

Look again at BBBSMB’s statement of financial position in Table 12.2 and the first line under

“current assets” as of June 30, 2014—it shows cash and cash equivalents totaling $3,286,153.

Now look at the line near the bottom of the statement of cash flows in Table 12.4—the line

labeled “cash and cash equivalents, end of year”—it’s the same number ($3,286,153). What the

statement of cash flows does is walk us through exactly how the cash changed from the

beginning to the end of BBBSMB’s fiscal year, which began July 1, 2013, and ended June 30,

2014. Cash flow may occur through operating activities, investing activities, or financing

activities. Think again about your own checking account. Cash might flow in from your

paycheck. You may have sold your car, a physical asset, and placed the proceeds in the same

account. Or you may have borrowed money from the bank and then deposited the amount of the

loan directly into your checking account. All those transactions comprise your cash flow, but

again, tracking just the flow of cash into and out of your checking account would not provide a

complete picture of your financial position; that requires looking at the cash flow in relationship

to the other financial statements discussed above.

Statement of Functional Expenses

The last financial statement we will consider is shown in Table 12.5—the statement of functional

expenses. This statement shows how every category of expense was allocated among the uses of

program services, general and administrative activities, and fundraising. It is from this data that

charity watchdogs, certain donors, and others calculate the ratios that some use to evaluate the

efficiency of an organization’s management and fundraising efforts. Let’s come back to that

point shortly.

Before leaving the discussion of financial statements, there is one additional concept that is

important to understand—depreciation. The concept of depreciation, and the way it is handled in

financial accounting, is sometimes difficult for individuals to quite grasp in terms of their

personal financial life. The most familiar experience that most of us have with depreciation is the

decline in the book value of our cars. Your new car may lose much of its value as soon as it is

driven off the dealer’s lot, and it will continue to decline every year that you own it. If you keep

it long enough, it will continue to decline until it is ready for the junkyard and is worth next to

zero. You may not feel that decline as an expense as it occurs, since it is not coming out of your

pocket or checking account each day, but clearly your personal net worth is less when the car

gets old than it was when the car was new. Thus, the car’s depreciation is a real expense in terms

of its effect on your total net worth, even though it may not affect your cash flow.

Let’s say a nonprofit organization owns physical assets, including cars, buildings, and

equipment. Those assets have a value, and that value is reflected on its balance sheet. But they

are assets that will be used up or wear out over some period of time, so their value declines with

every passing month or year. That decline must be accounted for as an expense, even though it

does not involve an actual outlay of money. Take a look at BBBSMB’s statement of functional

expenses in Table 12.5; the amount of depreciation of its assets in 2014 is reflected in about the

middle (included in “depreciation and amortization”), totaling $46,117. But it is an accounting

expense rather than a real outlay of cash, so an adjustment needs to be made to provide a clear

picture of BBBSMB’s cash flow. Take another look at Table 12.4, the statement of cash flows.

The $46,117 has been added back in on the first line under “adjustments to reconcile changes in

net assets to net cash provided by operating activities.” Without this adjustment, the statement of

cash flows would understate the amount of cash generated by operations during the year (Zietlow

et al., 2007, p. 182). Although depreciation is an accounting item rather than a cash outlay, some

organizations fund depreciation, that is, they set aside money for future maintenance or

replacement of their capital assets. This is not a cash expenditure in the given year because the

funds are, in effect, placed in a savings account to be used when needed at a later time; they

remain an asset of the organization. Failure to fund depreciation can present a problem for a

nonprofit when its facilities or other capital assets do become inadequate. Deferred

maintenance can make the financial picture look brighter than it really is, a fact that becomes

clear when the organization is faced with the need for a major expense, say for a new roof or

vehicle, without having put funds aside to cover it (Mattocks, 2008, p. 91).

Using Financial Ratios

Now that we have examined some basic accounting principles and looked at the financial

statements that nonprofits produce, what do we make of the data? How can we interpret the

financial data and use it to make decisions about the financial management of the organization?

The concept of financial ratios was introduced back in Chapter 6, which discussed some ratios

that external observers use to evaluate the performance of nonprofit organizations. Readers may

recall from that chapter that a 2004 study by the Urban Institute and Harvard’s Hauser Institute

(Fremont-Smith & Cordes, 2004) looked at 10 charity watchdog organizations that use financial

ratios and found a variety of measures being applied, including variations of the following:

 The ratio of program expenses to contributed income

 The ratio of fundraising expenditures and private support received—that is, the cost of

raising a dollar

 The percentage of total expenses (or income received from contributions) spent on

charitable programs or activities

 The percentage of total expenses spent on fundraising and administration (overhead)

 Accumulated cash and asset reserves in relation to operating budget

These ratios measure an organization’s efficiency rather than its effectiveness. They might be of

interest to the organization’s board and management, but taken alone, they may not provide an

appropriate way to rate or rank nonprofits. Indeed, some argue that a misplaced emphasis on

efficiency has prevented many nonprofits from building capacity and achieving impact (Pallotta,

2010).

There are a number of ratios that can be calculated from the data provided on an organization’s

financial statements or similar data obtained from the Form 990. The ratios that are most

commonly tracked by managers are those that measure profitability, liquidity, asset

management, and long-term solvency (Anthony & Young, 2005, p. 488). This chapter does not

go into detail on the calculation of ratios but rather will focus on explaining the concepts that

they are intended to measure and their significance to assessing the financial health of a

nonprofit organization.

Although the term profitability may seem out of place in the nonprofit setting, it is just

describing the change in net assets on the statement of activities; in other words, it considers

whether the organization had an operating surplus, broke even, or operated at a loss. Liquidity

relates to the organization’s use of cash.

Remember from the earlier discussion the example of the friend who thinks himself wealthy

because he anticipates an inheritance but who lacks the cash to pay for dinner. To avoid being in

a similar bind, an organization needs to manage its cash flows effectively in order to be

sufficiently liquid, that is, possessed of sufficient cash at the right times to meet its obligations as

they come due. An analysis of cash management would address areas such as accounts

receivable, accounts payable, and inventory maintained. For example, if clients are slow to pay

bills for service, the organization will need to keep more cash on hand to pay its own bills as they

come due. If the collection process could be made more efficient, it would need to maintain less

of a cash balance and that money then could be put to work in other productive ways. Vendors

need to be paid on time, but effective management of the process could reduce the amount of

unproductive cash needing to be kept on hand. To use another example from personal financial

life, there may not be a need to keep money sitting in your checking account on the 15th of the

month if the rent is not due until the 1st, and you know you will be receiving a paycheck in the

meantime. Tracking when revenues come in and when bill payments are due is a way to stretch

dollars further and gain more leverage from your personal cash flow.

Another issue for organizations is management of inventories. If too much money is tied up in

inventories, it may leave too little liquidity to meet cash obligations as they arise. For example, if

a food program spends all its cash to fill up its freezers with a six-month supply of food, then it

may be in a bind to pay its staff or other expenses. Developing a more efficient system for food

purchases that could reduce the amount of inventory kept in the freezer could provide for more

liquidity to meet other obligations or to be put toward more effective purposes.

Management of fixed assets requires looking at how efficiently they are being used; for example,

how much revenue is being generated through the use of buildings and equipment? The

condition of assets needs to be tracked and adequate funds earmarked for replacement or repairs.

That is a way to avoid unexpected expenses for which there may not be funds readily at hand

from current revenue.

Assessing long-term solvency, that is, evaluating whether the organization is financially strong or

in jeopardy, requires looking at the right-hand side of the statement of financial position, the

liabilities, as well as the revenue and expenses shown on the statement of activities. One big

issue is the amount of debt, specifically the relationship between assets and liabilities. Borrowing

funds may be a good thing; it provides the organization with a way to leverage its assets and

support a larger program of services than it could just with current revenue. But obviously, debt

also increases risk and requires careful management of cash flow to ensure that debt payments

can be made when due (Anthony & Young, 2005).

Ron Mattocks (2008) describes a “zone of insolvency,” a “period of … financial distress during

which prudent people could at least foresee the possibility of insolvency” (p. 87). Insolvency

means a situation in which the organization can no longer continue in business and may need to

either declare bankruptcy or close down. This condition can be detected by monitoring indicators

and ratios that may sound an alarm bell. Most boards will be alert to the alarm, since the law

imposes especially demanding requirements on the governing board in such a situation

(Mattocks, 2008). What are the alarms that may signify the zone of insolvency? Liabilities

exceeding assets is one, although that may occur temporarily without too much concern, for

example, if the organization has recently borrowed money to expand its programs and anticipates

increased revenue soon. One warning sign is inadequate cash flow, especially if it is inadequate

in comparison to the organization’s debt. Another test is whether the organization would be able

to pay all of its creditors should it cease operations tomorrow; if not, then it may be in financially

unhealthy territory (Mattocks, 2008).

Which are the most important financial ratios to watch and manage? Zietlow et al. (2007) make

the case that for most nonprofit organizations, liquidity—“the ability of the organization to

augment its future cash flows” (p. 23)—is the biggest potential problem. Many nonprofits

depend on contributions, but giving may fluctuate from year to year. An unforeseen event, such

as the loss of a key donor or perhaps a decline in allocations from United Way, can leave a

nonprofit in a cash crunch, stretched to meet its own obligations. Some pledges, which are

reflected on the financial statements as assets, may in fact not be paid, and estimates of how

much may be uncollectible may not be based on reliable information. If the organization depends

on earned income, it faces business risks; if a college’s enrollment turns down, a concert attracts

fewer than expected attendees, or a blizzard reduces attendance at a major fundraising event,

revenue may turn out to be much different from what the budget anticipated.

Nonprofits that rely on contracts may face similar problems; for example, costs may exceed what

was projected and exceed the revenue that the contract provides. Some clients may be slow to

pay. The only options might then include obtaining short-term financing from banks or other

lenders, making emer-gency appeals to donors, tapping into reserves or even quasi endowment,

delaying payments to vendors, and reducing costs by cutting staff or their compensation. Zietlow

and colleagues (2007) argue that such problems are “endemic to the nonprofit sector [and that

liquidity] is one of the most important yet least studied areas in the management of nonprofits”

(p. 23). Zietlow et al. criticize the charity watchdogs, such as the BBB Wise Giving Alliance and

others, who set a maximum that organizations should keep in reserves. The view of the charity

raters is that excess funds held in reserve should instead be used to support current programs and

services. But Zietlow and colleagues argue, “[While] these policy guidelines may be appropriate

for commercial nonprofits, [they] will severely limit the management style of small donative …

organizations” (p. 24). Drawing on data from a study that Zietlow conducted in 2002 to 2004,

these authors suggest a model that nonprofits can use to determine the appropriate level of

liquidity to maintain (pp. 28–43).

Managing Endowment Funds

As noted previously, most nonprofit organizations do not have significant endowments; most are

held by large institutions such as colleges and universities, health organizations and medical

institutions, museums, and major arts centers. The largest is the endowment of Harvard

University, which totaled almost $33 billion in 2013. Other institutions with substantial

endowments in 2013 included the Salvation Army ($2.2 billion), United Way Worldwide ($1.5

billion), the Art Institute of Chicago ($870 million), WWF (World Wildlife Fund) ($208

million), and Save the Children ($141 million) (Explore Endowment Data, 2014).

Of course, the stock market decline in 2008 and early 2009 hit many nonprofit endowments hard.

Many nonprofits were forced to make adjustments in their operating budgets to reflect the lower

income available from endowment, and others postponed new projects or programs. But

remember our discussion in the early part of this chapter; unlike individuals, many substantial

organizations and institutions intend to exist forever. They make adjustments to accommodate to

economic cycles but also expect to recover their endowments as the economy turns around in

years ahead. Indeed, by the fall of 2012, U.S. stock markets had almost doubled from the bottom

reached in March of 2009, and, by 2015, market indexes had reached historic highs.

As discussed earlier, some endowment may be created by the nonprofit’s board from internal

resources, perhaps from excess operating surpluses accumulated over several years. Although

board-designated endowment could be expended at the board’s discretion, it is intended for long-

term use and would generally be managed according to the same policies applied to permanent

endowment created through donor-designated gifts. Term endowments, which are established for

a period of years, after which the funds may be spent, might be invested and managed

differently, depending on the date of their anticipated termination. The discussion of endowment

management here applies to funds that the organization intends, or must, hold for investment in

perpetuity, using only the annual income earned from investments to support its operating needs.

There are two key concepts related to the management of endowment funds. One is the total

return approach to investing endowment assets, and the other is the spending limit that

determines how much will be available from endowment for expenditure each year.

In earlier decades, a large portion of endowment assets was invested in relatively secure, interest-

paying instruments, such as bonds and bank certificates of deposit. The drawbacks of this

approach became evident in the high-inflation economy of the 1970s, since the fixed amount of

interest income became increasingly inadequate to support the activities for which the

endowment was intended. Over the long term, investments in stocks produce higher overall

returns and keep pace with inflation, but stocks often pay dividends that provide less current

income than bonds. Institutions found a way around this dilemma by adopting the total return

approach to investing endowments, combined with a spending limit to determine how much

could be used each year.

The approach is to invest in a portfolio that includes stocks, cash, bonds, real estate, and other

classes of assets, providing for the long-term growth of the principal. The investment strategy is

to maximize total return—that is, the total of interest, dividends, and appreciation in the value of

stocks and other assets—consistent with a level of risk that the organization’s board has

determined to be acceptable. Each year, some percentage of the total market value of the

endowment is withdrawn from the endowment fund and transferred to operating funds for

expenditure that year. Any additional investment returns are reinvested in the principal, enabling

it to grow. The amount withdrawn and spent is determined by the spending limit (or payout rate)

established by the board. It can be varied from year to year as economic conditions change. The

goal is to provide enough payout each year to meet the needs of current programs, while also

allowing the value of the endowment principal to grow to keep pace with inflation and provide

more income to sustain programs in future years. The latter is not only important to maintain the

benefit of the endowment to the organization; it is also essential in order to keep faith with the

intention of a donor who wished to support some activity in perpetuity.

Let’s take a look at a simple example in Table 12.6 to see how this approach might work over a

period of five years. It is important to emphasize that Table 12.6 shows a simplified example and

that most organizations do not spend a percentage of the market value of their endowments based

on its value at the end of a given year. For example, many calculate a multiyear average of the

endowment’s market value, and the spending policy is then applied to that average. That is a way

to ensure that the amount available for spending each year does not fluctuate wildly with changes

in the value of stocks and other assets—using the average will smooth out the ups and downs.

Many foundations also use a similar methodology, which accounts for why their grant-making

may be affected only a few years after a significant downturn or upturn in the financial markets.

Some endowments are managed using a somewhat more complicated approach, but that is

beyond the scope of this discussion.

Again, in order to simplify our discussion here, Table 12.6 does not reflect the averaging

approach; it just assumes that the nonprofit has a spending policy that permits spending the

following year equivalent to a fixed percentage of the endowment fund’s value at the end of the

previous year.

In looking at Table 12.6, assume a donor has made a gift of $500,000 for the purpose of

endowing “full-tuition scholarships” to students in perpetuity. Tuition is now $25,000, but the

assumption in this example is that it will increase by an average of five percent each year.

Assume also that the original gift is invested in a portfolio of securities that will earn an average

of 10 percent each year, in some combination of interest, dividends, and appreciation. That

would be high in terms of actual experience, but the round number will simplify our example.

Based on the assumptions, in the first year, the $500,000 endowment earns $50,000. The college

could spend $50,000 to award two full-tuition scholarships that year. But the problem with that

approach would start to become obvious in the second year. The endowment would still be just

$500,000; it would again earn $50,000, which would no longer be enough for two full-tuition

scholarships at the higher tuition rate. Instead, if the college awards one $25,000 scholarship the

first year (equivalent to the five percent payout rate that the board has established), and reinvests

the additional $25,000 back into the endowment, the principal of the endowment now becomes

$525,000. If it follows that practice every year—spend five percent and reinvest five percent—

look what happens as we go down the table to Year 5. Because the endowment principal has

been increased, the five percent available for spending also has increased sufficiently to cover

the ever-higher cost of tuition.

Following this approach and continuing out forever into the future, if all the assumptions hold,

there will always be sufficient income from this endowment to provide a “full-tuition

scholarship,” which was the intention of the donor. Now, if the market has a bad year, it may not

earn 10 percent, but in some years it may do better than 10 percent, averaging out over the long

haul. Tuition may increase more than expected, or less. The board can adjust the spending limit

as well as the investment portfolio to accommodate these trends as they emerge. Properly

executed, this approach enables the organization to count on ever-increasing income from its

endowment and to keep faith in real terms with the intention of its endowment donors.

Endowment management is governed by state law. A model act, called the Uniform Prudent

Management of Institutional Funds Act (UPMIFA), was introduced in 2006 and by 2012 had

been adopted by most states. It requires that in making investment decisions, boards exercise

“the care an ordinary prudent person in a like position would exercise under similar

circumstances” (Griswold & Jarvis, 2009). The law thus provides flexibility but places

responsibility on boards for preserving the purchasing power of endowment funds and assuring

that the intent of endowment donors is carried out to the extent possible.

Developing and Managing the Budget

A nonprofit organization’s financial statements are important documents to individuals both

inside and outside the organization. But on a month-to-month or day-to-day basis, for most

people working in the organization, the budget and reports related to the budget are the guides to

action. A full discussion of budgeting is beyond the scope of this text, but this section will

summarize some of the more important principles and concepts.

Most nonprofit organizations have three separate budgets: an operating budget, a capital

budget, and a cash budget. As their names suggest, the first tracks all revenues and expenditures;

the second concerns the purchase or disposal of long-term physical assets, such as buildings and

equipment; and the third tracks the flow of cash during the year, whether related to operating or

capital activities. As David Maddox (1999) correctly observes, “Most people think of the

operating budget when they think of a budget (if they do at all)” (p. 60). Our discussion in this

section focuses generally on principles that relate to developing and managing the operating

budget, although some are relevant to the others as well.

A budget is a political as well as financial document. Some say that the budget reveals an

organization’s “real strategy,” despite what may be written in the strategic plan or other

documents (Maddox, 1999, p. 12), because the budget is a tangible expression of what the

organization’s real priorities are. It reflects not only considered plans but also the push and pull

of political forces within the leadership of the organization. Readers may recall the idea of

nonprofit leaders’ political frame, an idea described by Robert Herman and Richard Heimovics

(2005) and discussed in Chapter 5. Managers may be guided by a strategic plan, but various

departments, programs, or purposes are in competition for the organization’s limited resources,

and the outcome of that competition may be important in determining where funds are actually

allocated.

Budgets invariably create incentives and disincentives that will affect the behavior of managers

and staff. For example, some organizations have a use-it-or-lose-it approach to annual budgets. If

a department has not expended its budgeted funds by the end of the fiscal year, the remaining

funds do not carry over to be available to the department the following year. The organization’s

top budget managers may be counting on unexpended funds in some department budgets to

cover overspending by others or as a reserve of sorts to cover unanticipated expenses of the

general organization. But savvy managers often work to ensure that no unspent money remains,

rushing to place orders for supplies and new computers before the fiscal year ends. The use-it-or-

lose-it policy thus may turn out to create a perverse incentive that results in needless spending.

The way in which budgets are structured, whether on an organizational or center basis, also

affects incentives. For example, a university may develop a budget that treats tuition from all

students as revenue to the institution as a whole. Individual colleges, schools, and programs then

are given an expense budget on which they need to operate, and the dean or director of each is

responsible for not exceeding the budgeted amount. The individual units thus are viewed as cost

centers, and their managers may have little incentive beyond controlling costs. Or the university

may budget on a center basis, that is, the university regards each unit as a profit center. In this

model, the school or college keeps the revenue it generates, from which it meets its own direct

costs and makes some contribution to cover general institutional costs and services provided to

the unit by the overall organization, for example, its share of expenses related to utilities and

information systems technology. This approach may create considerable incentive for unit heads

to be entrepreneurial and undertake new efforts to increase revenue. However, the trade-off may

be that the central administration has less control and a reduced ability to reallocate funds across

units, either to address institutional priorities or to cross-subsidize less profitable programs

through the surpluses of others.

Another consideration is whether budgets are developed incrementally or allow for

redistribution. A common and simple way to develop next year’s budget is just to add some

percentage to last year’s budget or to the amounts actually expended, maybe one percentage for

salary increases and another for other expenses. If the allocation is based on funds expended,

then it will, of course, exacerbate the tendency of units to make sure they spend all of last year’s

budgeted amount before the year ends. If they do not, they take, in effect, a double hit: They lose

the unexpended funds at the end of the year and also receive a reduced allocation for the year

that follows. Other budgeting systems allow for considerable redistribution from one year to the

next. One benefit of having a strategic plan with specific goals and objectives is that it can serve

to justify such redistribution over time in order for the organization or department to pursue

strategic priorities. If the plan has been developed in a participative process, with buy-in from all

parts of the organization, it may help mitigate the inevitable political pressures that come to bear

on annual budgeting.

Another process, perhaps at the extreme of the redistribution spectrum, is the zero-based

approach. All programs and departments start at zero at the beginning of each year’s budget

process and need to justify their budgets from the ground up. But this approach has a number of

disadvantages, including the amount of time and effort required to prepare justifications and the

potential for management competition and negative staff morale (McMillan, 2003b).

A fundamental idea in budgeting is to recognize the difference between controllable and

uncontrollable expenses and to hold managers accountable accordingly. Individual departments

or programs may be credited with or charged with revenues and expenditures attributable to

them, but a manager can only be held responsible for line items under his or her control. For

example, a manager may be able to control salaries, travel, and the use of outside consultants, but

he or she may not be able to control, at the department or program level, items such as fringe

benefits, rent, heat, or electricity. Monthly budget reports typically show—for each line item—

the amount budgeted for the year, the amount and percentage of the annual budget for that item

expended year-to-date, and a comparison with the amount spent the previous year to the same

date. Such reports enable managers to note significant variations from the budget and make

midyear corrections as needed.

Sample nonprofit budgets are difficult to find in public sources, such as on the Web, because

they are typically specific to each organization. The operating budget for the organization is an

internal document that it is not required to be made publicly available. There are, however, a

variety of online resources available that do provide templates and other guides to budget

development.

Risk Management, Financial Policies, and Controls

As discussed in Chapter 6, recent years have included increased demands for accountability

throughout American society. In this environment, it is essential for well-managed nonprofits to

identify potential risks to the organizations and to develop strategies for preventing or

minimizing the impact of those that could adversely affect achievement of the mission.

Although we discuss risk management in this chapter on financial management, it is important to

understand that not all risks are strictly financial, although many have financial implications. A

risk is “any uncertainty about a future event” and usually falls into one of four categories:

 People: Board members, volunteers, employees, clients, donors, and the general public

 Property: Buildings, facilities, equipment, materials, copyrights, and trademarks

 Income: Sales, grants, and contributions

 Goodwill: Reputation, stature in the community, and the ability to raise funds and appeal

to prospective volunteers (“A primer on risk management,” 2007)

Risk management requires identifying scenarios that could negatively impact the organization

and then devising policies and controls to either prevent those events from occurring or to

provide financial protection to the organization if one does occur. Some risks are related

primarily to finance. For example, a major donor or sponsor could withdraw support,

precipitating a budget crisis or that costs of a program might exceed projections for some

unforeseen reason. An organization dependent on government funding might be impacted by

budget cuts, or earned income revenues might decline if the economy goes into a recession. A

decline in the overall economy and the stock market also could adversely affect gift revenue and

the value of endowment. And, unfortunately, there is always the risk of financial fraud and abuse

by a volunteer or executive. Other risks are not primarily financial but have financial

implications. For example, a volunteer, client, or staff member may be treated unfairly or

unethically. That could have negative consequences for the organization’s reputation and, in

addition, that person might bring legal action that would result in a financial payment. Someone

could slip and fall on the sidewalk or be injured in the nonprofit’s facility due to conditions that

would create liability. There could be damage to the organization’s facilities, vehicles, or other

physical assets as a result of an accident catastrophe. An organization must establish policies to

minimize the chances of such negative events and maintain insurance and reserves to provide

financial protection if one does occur.

Like laws, policies may be prescriptive or restrictive—that is, they can state what must be done,

or they can limit or place boundaries on the actions that may be taken under certain

circumstances. Zietlow and colleagues (2007) agree with John Carver (2006), whose views were

discussed in Chapter 4, that “the prescriptive approach to policy is doomed to failure” (p. 145). It

is just impossible to predict all future circumstances, it is undesirable to unduly limit the

flexibility of managers, and enforcement is difficult with the prescriptive approach. For example,

society can make laws that prohibit people from driving too fast, driving after consuming

alcohol, or driving without seat belts. But a law that required “safe driving” would be

unenforceable because it encompasses too wide a range of possible behaviors. Zietlow and

colleagues identify three basic categories of financial policies that nonprofit organizations should

have: accountability and regulatory compliance policies, financial and financial management

policies, and data integrity policies.

Accountability and regulatory compliance policies encompass matters such as filing Form 990,

avoiding conflicts of interest, and meeting other requirements of behavior or disclosure required

by law. Financial and financial management policies are established by the governing board.

They may identify allowable ranges for specific financial indicators or ratios, for example,

liquidity, debt, or assets held in the endowment fund. They may also encompass procedures for

purchasing, risk management, internal financial controls, fundraising, and other areas of activity.

The third category, data integrity policies, involves privacy, confidentiality, records retention,

the separation of duties, data backup, and other such concerns (Zietlow et al., 2007, pp. 146–

154).

Internal controls have increasingly become a focus of attention in the wake of several scandals

of malfeasance by nonprofit executives, and some nonprofits have adopted internal control

policies similar to those required of public corporations by Sarbanes-Oxley. By one widely

accepted definition, an internal control is

a process, [italics added] affected by an entity’s board of directors, management and other

personnel that provides reasonable assurance regarding the achievement of objectives with

regard to the effectiveness and efficiency of operation, reliability of financial reporting, and

compliance with applicable law and regulation. (Coe, 2011, p. 31)

As Charles Coe (2011) explains, the first step is to create a “control environment” (p. 34). This

includes adopting codes of conduct and conflict of interest policies; implementing professional

management of staff (for example, job descriptions, background checks, annual performance

evaluations, and other recommended practices); maintaining an independent board and providing

information to the board; a management style that includes communication with staff and fiscal

conservatism; and an organizational structure that assures the flow of information. Coe

recommends then establishing controls in five principal risk areas: staffing, accounting,

information management, travel, and physical assets. Management and the board then need to

create a robust information/communication system and regularly monitor effectiveness of the

control system through audits, financial reports, and internal control and compliance reports (pp.

35–40).

One fundamental principle of internal control requires that duties of individuals be separated so

that no one person handles an entire transaction from beginning to end. For example, it is

common to have policies that require that the person who enters donor gifts is different from the

person who deposits the funds, that the person who reconciles the checking account monthly is

different from the person who signs the checks, and that payments to vendors be made only with

an invoice approved by someone other than the person who sends the payment.

As Zietlow and colleagues (2007) observe, “Depending on the nature of your organization and

the specific policy, internal or external noncompliance can range from fraud to poor business

management, from felony to raised eyebrows” (p. 138). Ensuring that such policies are in place

and followed is a fundamental aspect of responsibility for nonprofit managers and boards.

Chapter Summary

Financial management goes to the heart of the board’s fiduciary responsibility, and any problems

involving budgets or assets are likely to demand immediate attention from the board and the

nonprofit CEO. Bookkeeping involves the entry of financial transactions on the organization’s

records, and accounting encompasses the rules by which transactions are categorized and

reported. Financial management is a broader concept. It includes developing diverse sources of

revenue and requires making judgments based on data in financial statements, relationships

among that data, and financial management policies of the organization.

Although the terminology of nonprofit accounting is precise and can be unclear to those without

a financial background, the basic concepts have analogs in the personal finances of individuals.

For example, operating funds are similar to a personal checking account and operating reserves

are like savings. A nonprofit may have board-designated endowment, which is like an

individual’s retirement funds—it is intended for investment over the long run, but the board can

withdraw the funds if it has compelling reason. Permanent endowment must be invested in

perpetuity because donors have placed that requirement on their endowment gifts. The nonprofit

can withdraw the principal from an endowment only with agreement of the donor or a court.

Individuals do not have a component of their personal finances that can be compared with

permanent endowment, since they are mortal and do not hold funds in perpetuity.

There are two basic methods of accounting, the cash basis and the accrual basis. Very small

organizations that do not have accounts receivable or payable may use the cash method, but most

use the accrual method, which is required for audited financial reports. In accrual basis

accounting, revenues and expenses are recorded as they are earned or as obligations are incurred,

not necessarily when the cash is received or paid out. Thus, reports based on the accrual method

may provide a better picture of the organization’s real financial picture than ones based on cash.

However, it is also necessary to look at cash flows to get a complete sense of the organization’s

financial position. Nonprofit accounting standards are established by the Financial Accounting

Standards Board (FASB), which defines generally accepted accounting principles (GAAP).

There are four financial statements that many nonprofits produce for external purposes. The

statement of financial position (or balance sheet) provides a snapshot of the organization’s assets,

liabilities, and net assets at a point in time, usually the end of its fiscal year. Net assets are

equivalent to equity in a company or an individual’s net worth.

The statement of activities shows revenues, expenditures, and changes in net assets over a period

of time, usually a fiscal year. In a business, this would be the profit-and-loss statement. Revenues

include receivables, for example, pledges from donors that have not yet been paid. Expenses

must be allocated among programs and supporting services, including general management and

fundraising. The statement of functional expenses shows the allocation of expenses among those

categories in detail.

Finally, the statement of cash flows reveals cash transactions from operations, financing, or

investing activities and the changes in cash balances over the period of the report, generally one

year. Depreciation of the value of physical assets is an expense that is shown on the statement of

activities. It must be added back in on the statement of cash flows to provide an accurate picture.

The Notes to the Financial Statements often provide important details and should be read in

conjunction with the statements.

Financial ratios provide an important tool of financial management, although they are not a

sufficient basis on which to rate nonprofit organizational performance. Some say that an

overemphasis on such ratios has limited nonprofits’ growth and impact. Commonly used ratios

include those related to profitability, liquidity, asset management, and long-term solvency.

According to some experts, liquidity is an endemic problem for nonprofit organizations. Cash

management strategies may include speeding up the receipt of payments, managing the timing of

expenses, reducing inventories, and obtaining a line of credit to cover temporary cash needs.

Analytical models are available to determine the appropriate target for liquidity. If key ratios are

not within acceptable limits, an organization may be flirting with bankruptcy, that is, it has

entered the zone of insolvency. This condition places increased responsibilities on governing

boards.

The largest endowment funds are held by major institutions, such as universities, but in recent

years, many types of nonprofits have worked to establish or build endowments. Most

endowments are invested under the total return concept. The board of the organization sets a

spending limit, which is a percentage of the endowment’s market value each year (or,

commonly, of an average over a period of months or years). That amount is spent to support

programs, and any additional investment gain is reinvested in the principal of the endowment.

The payout may come from interest, dividends, or the appreciation in value of equities. That

approach enables the principal and the income to grow over the years to match the higher future

costs of activities that the endowment is intended to support.

Most nonprofits have three budgets: an operating budget, a capital budget, and a cash budget.

The operating budget usually commands the most attention. The budget is a political document

that reflects not only plans but also the competition for resources within the organization. How

budgets are constructed creates important incentives and disincentives that affect managers’

behavior. One important consideration is whether budgets are maintained on an organizational or

center basis and whether departments and programs are treated as cost centers or profit centers.

Some budgeting methods simply add a percentage increment to previous years’ budgeted or

expended amounts, while others provide greater opportunity for the redistribution of funds across

programs or units. Some expenses, such as salaries, are controllable. Others, such as fringe

benefits, are less so. Unit managers should be accountable for expenses that are within their

control.

Accountability in the current environment requires that nonprofits have explicit policies in three

areas: accountability and regulatory compliance policies, financial and financial management

policies, and data integrity policies. Internal controls are established to prevent financial fraud or

abuse. They should be applied within an environment of control and include processes related to

risk areas. One essential principal is that financial transactions involve more than one person.

Audits and other compliance reports can be used to monitor the effectiveness of the control

system. Ensuring that appropriate policies and controls are in place is a fundamental aspect of the

governing board’s responsibility.

Notes

1. There are some endowments called term endowments that can be spent after a period of time

passes. They are temporarily restricted. We do not consider them in this discussion.

2. Because the board does have the power to withdraw money from a quasi endowment,

accounting rules require that such funds be treated as unrestricted in financial statements.

3. Some property owned by a nonprofit may also be considered permanently restricted, like

endowment. For example, this would be true of a work of art that a donor gave with the

condition that the nonprofit not sell it.

KEY TERMS AND CONCEPTS

 accountability and regulatory compliance policies

 accounting

 accounts payable

 accounts receivable

 accrual basis of accounting

 asset management

 bookkeeping

 capital budget

 cash basis of accounting

 cash budget

 cash flow

 cost center

 data integrity policies

 endowment (board-designated and permanent)

 financial accounting

 Financial Accounting Standards Board (FASB)

 financial management

 generally accepted accounting principles (GAAP)

 in perpetuity

 internal controls

 liquidity

 managerial accounting

 operating budget

 operating reserves

 permanently restricted

 prescriptive policies

 profit center

 profitability

 pure endowment

 quasi endowment

 restrictive policies

 risk management

 spending limit

 statement of activities

 statement of cash flows

 statement of financial position

 temporarily restricted

 total return

 Uniform Prudent Management of Institutional Funds Act (UPMIFA)

 unrestricted

 zone of insolvency

CASE 12.1 Hull House

Hull House was founded in Chicago in 1889 by Jane Addams and Ellen Gates Starr, with the purpose of serving

Chicago’s immigrants and helping the city’s poorest citizens improve their lives. Hull House was the flagship of

what became known as the “settlement house movement,” including nearly 500 facilities by 1920. Hull House was

pioneering and established a model for many nonprofits founded in following years. In 1931, Addams received the

Nobel Peace Prize for her work (Wade, 2005; West, 2012b).

Hull House and other settlement houses provided residential facilities and a range of social services. In addition,

Addams and house residents became advocates who worked for many social reforms of the early 20th century,

including public recreational facilities, child labor laws, juvenile courts, and women’s suffrage. By the 21st century,

the Hull House Association had become a federation of neighborhood centers and programs, including job training,

homeless services, foster care, child care, domestic violence, and small business development, serving 60,000

people a year in various locations throughout Chicago. In 2012, after 120 years, it was forced to close and dismiss its

300 staff members. Many of its programs were taken over by another nonprofit, Metropolitan Family Services

(Wade, 2005; Weber, 2012; West, 2012b).

In its early years, Hull House was supported primarily by private funds raised by Addams. That pattern began to

change in the 1960s, when the Great Society programs of President Lyndon Johnson expanded funding for social

programs, much of it channeled through nonprofit organizations (West, 2012b). By 2012, Hull House depended on

government funds for 85 percent of its budget (West, 2012b). With the economy entering recession in the late 2000s,

the demand for services greatly increased, while government support did not keep pace. Hull House reduced its

budget from $40 million to $23 million and cut programs, but its debt continued to grow. When it filed for

bankruptcy in 2012, it reported liabilities of $10 to 50 million against assets of just $1 to 10 million (Yerak, 2012).

There was disagreement about the causes of Hull House’s demise. The board chair blamed the economic climate,

although Hull House had financial problems in 2007, before the recession that began that year (Moyers, 2012). “We

should have narrowed our focus even more,” the board chair acknowledged. But he also claimed that the staff had

sugarcoated the situation, providing financial statements that were late and failed to reveal the seriousness of the

situation, although a former chief executive disagreed with that assessment (Moyers, 2012; West, 2012b). The

former CEO was critical of the decision to close and criticized the board for “not understanding the idea of ‘living

on the edge’” (Moyers, 2012).

“Hull House is not an isolated situation,” observed Irv Katz, president of National Human Services Assembly. “I

have witnessed a couple of national groups that should have merged, but out of stubbornness or arrogance, allowed

themselves to go too far down the tube rather than look for a partner” (West, 2012b). The former chief executive of

Hull House said that he had suggested two potential partners to the board but that the board rejected them (West,

2012b). The board chair observed that by the time mergers were explored, Hull House had accumulated too much

debt to be of interest to potential partners (West, 2012b).

Efforts to save Hull House in its later days included consideration of increased fundraising, with the goal of

diversifying revenue sources and reducing dependence on government. But the board did not include members who

could provide major support personally or who were connected to sources of wealth. Hull House had little other

capacity for philanthropic fundraising. Ian Bautista, president of United Neighborhood Centers of America, cited

Hull House’s situation as a widespread problem. In his view, many organizations that were once reliant on gifts,

including United Way, have become too reliant on government funds and have “lost a lot of the connections and

ability [to successfully raise private funds]” (West, 2012a).

Rick Moyers, a foundation officer and governance expert, blamed both parties for the failure, writing that “Hull

House is a sobering case study of governance failure in which neither the board nor the staff seems to have

recognized the crisis while there was still time to turn things around” (Moyers, 2012).

Questions Related to Case 12.1

1. Which principles of financial management discussed in this chapter are most relevant to the case of Hull House?

2. Was the closure of Hull House inevitable? If not, what actions might have been taken, and at what point, to

prevent its demise?

3. Think back on (or reread) key principles regarding board responsibilities (Chapter 4) and executive leadership

(Chapter 5). How does the case of Hull House relate to each of those principles?

CASE 12.2 Corcoran Gallery of Art and Corcoran School of the Arts and

Design

The Corcoran Gallery of Art was established by Washington, DC, businessman William Wilson Corcoran, an early

collector of contemporary American Art. The gallery was opened in 1874 in a building that Corcoran had

constructed and was moved to another new building, near the White House, in 1897, built to house an expanded

collection and the recently established Corcoran School of Art.

Although it was a nonprofit institution, during the early 20th century, the Corcoran served as the nation’s unofficial

national art gallery. Even after establishment of the federally subsidized National Gallery of Art in 1937, it

continued to enjoy the support of many wealthy Washingtonians. But in 1989, the Corcoran was engulfed in

controversy, when the director cancelled an exhibit of works by photographer Robert Mapplethorpe in the face of

political controversy about its content. Demonstrators gathered outside the gallery to protest the decision. Some

artists and donors expressed disappointment. Some Corcoran directors resigned. And the gallery’s reputation was

badly damaged (Mullins, 2012).

David Levy joined the Corcoran as the new director in 1991, determined to turn the situation around. By 1995, many

friends and donors had been reassured and fundraising had doubled. But the gallery still barely broke even, given the

costs of maintaining its aging building, and it had difficulty attracting paid attendance in light of the free galleries of

the Smithsonian just blocks away. Levy’s idea was to build a dramatic new wing, designed by architect Frank

Gehry, which would become an attraction in itself. The board agreed to spend millions on the plan and a fundraising

campaign was launched, securing pledges for about half the cost. Then things fell apart. New security established in

Washington in the wake of the terrorist attacks of September 11, 2001, made it difficult to access the gallery, and

attendance declined. The crash of technology stocks that same year left some major donors unable to fulfill their

pledges. The project was cancelled and, in 2005, Levy resigned (Mullins, 2012).

Fallout from the failed campaign was substantial. Some donors who had given were angry that their gifts had been

spent for nothing accomplished. Others said they were insulted because the Corcoran never contacted them to offer

an explanation. Outreach to former donors was not maintained, and some who were called told the gallery never to

contact them again. By 2008, the operating deficit had reached $2.6 million. The stock market decline of 2008

reduced the endowment by one third. Some board members refused to help with fundraising, saying they had been

embarrassed by the fiasco over the Gehry building. Financial crisis loomed, and the board was desperate for a

solution (Mullins, 2012).

The financial challenges existed on two fronts. By 2012, the operating budget deficit had increased to $7 million a

year (Montgomery, 2012a), and the historic building required $130 million in repairs (Mullins, 2012). The board

began to explore the possibility of moving to a new location, possibly even outside of the city. Upon learning this,

employees and art students protested and wrote letters to the newspaper. Their anger was especially focused on the

board chair and the president, whom the board had appointed and who was a businessman rather than a professional

arts administrator. Trust with donors and the community was further eroded (Mullins, 2012).

One donor told the Washington Post that he was not even receiving solicitations from the Corcoran. Another

reported, “I haven’t gotten a phone call from the Corcoran in five years.” “Years ago,” one major philanthropist

said, “we went to the Corcoran Ball (the gallery’s principal annual fundraising event), “but we were never asked

back that I know of.” A former Corcoran trustee observed, “We never had the fundraising machine that I have

experienced with other arts institutions, and I think we haven’t had the fundraising base.” The Corcoran’s board

chair tried to explain: “If you’re going to go to serious people and serious foundations for serious amount of money,

seven-digit figures … you… have to show how in the bigger picture the viability question is answered”

(Montgomery, 2013b).

In 2010, the Corcoran sold one building it owned in Washington for $6.5 million, and, in 2013, it received two large

bequests, but not enough to resolve its financial problems. Also in 2013, it sold a 17th-century rug from its

collection for $34 million, but it was not clear that the funds could be used to address its financial problems, since

museum ethics require that proceeds from a sale be used to purchase additional items for the collection, not to pay

other bills (Capps and Montgomery, 2014). Other proposals to address the Corcoran’s problems also encountered

ethical concerns (Montgomery 2013a).

In December 2012, the Corcoran board announced that it had abandoned the possibility of moving, but “mystery still

[surrounded] exactly how the Corcoran [would] chart a course forward” (Montgomery, 2012a). Months later, in

April 2013, the Corcoran’s interim director and president announced a new “Strategic Framework for a New

Corcoran” that would include an agreement with the University of Maryland to explore a possible partnership. But

in February 2014, it was announced that discussion with Maryland had not produced a workable partnership and that

the Corcoran had reached agreements with two other institutions. The Corcoran’s art collection would be given to

the National Gallery of Art, which would keep some pieces for its own collection and give some to other galleries.

The National Gallery also would maintain a small exhibit in the Corcoran’s existing building. But that building and

the Corcoran School of the Arts and Design would become part of The George Washington University. Because the

Corcoran was a nonprofit corporation, the changes required approval from the court, which was granted in August

2014 (Montgomery & Judkis, 2014). “There is no way to continue the Corcoran as we knew it or as we know it,” its

acting president stated. “That’s going to be the kernel of pain for some people” (Montgomery, 2014).

Questions Related to Case 12.2

1. Which principles of financial management discussed in this chapter are most relevant to the case of the Corcoran?

2. Do you think the Corcoran’s problems were primarily related to principles of financial management, to policy

decisions made by its board, to changes in the environment over which it had no control, or to all of these reasons?

Explain.

3. Generally accepted principles of museum ethics prohibit selling items from the collection and using the funds to

meet other expenses. Do you agree with that principle, even if the alternative is the financial demise of the museum?

QUESTIONS FOR DISCUSSION

1. Some people argue that nonprofit organizations should not have endowments at all. One

of their arguments goes something like this: Putting money aside in endowment means

depriving today’s generation of the use of those resources so as to benefit future

generations, who will receive services supported by income from the endowment. But

there are many people in great need of services today. Why are tomorrow’s needy more

deserving than today’s? The funds should be spent now to meet current needs. Let future

generations of donors support the needs of people in the future. Since the economy is

growing, giving will increase over time, and there should be enough philanthropy to meet

those future needs. It is thus especially unjust to provide for the future at the expense of

people alive today, who live in less affluent times. Do you agree? Why or why not? What

arguments would you make on the other side of this issue? Would your views be different

with regard to different types of nonprofits, for example, homeless shelters, universities,

museums, or environmental organizations?

2. Look up the Form 990 of a nonprofit organization that interests you. (It is likely available

on GuideStar at www.guidestar.org.) Go through the financial data and develop your own

analysis of the organization’s finances. Questions you might think about include the

following: Does it appear to have diversified sources of revenue? How vulnerable or

unpredictable are these sources likely to be? What were its major categories of expenses

for the year shown? What unforeseen expenses could arise? What kinds of assets does it

hold? Does it have debt? What produced its cash flow for the year shown? Does it have

endowment or other permanently restricted assets?

3. The following items were reported in the Chronicle of Philanthropy. In each case, what

types of controls that might have prevented the incident were either not in place or did

not work?

 A former financial officer at a New York-based nonprofit that supports research

into genetic illnesses was arrested … on suspicion of embezzling more than $1.8

million from the organization… [The individual] served for more than eight years

as controller of the Hereditary Disease Foundation, exercising primary

responsibility for paying the charity’s bills and delivering grant funds for

medical studies. A federal criminal complaint … alleges [that the individual]

disguised transfers to bank accounts she controlled as grant payments in the

foundation’s accounting software. (“Ex-official at medical charity accused,”

2014)

 The American Civil Liberties Union has generated a major controversy within its

ranks by conducting undisclosed research on donors and potential donors. The

situation has already sparked an investigation by the New York State attorney

general that could have serious implications not only for the civil liberties group

but also for many other charities unless the organizations move quickly to

reassure donors that protecting their privacy is paramount. (Wilhelm, 2005a, p.

47)

 Eighteen months after the Milwaukee Public Museum, one of the largest natural

history museums in the country, shocked the city by revealing that it was in a

financial crisis, one of its top executives appears to be the only one to face

criminal charges in the museum’s near collapse. [The chief financial officer], who

left his job … after [the] problems became public, was charged by Milwaukee’s

district attorney with using money from the endowment to cover operating

expenses as the museum sank into a financial crisis, and lying about his actions in

board meetings to hold onto his job, according to criminal charges filed this

month. He did not profit personally from his actions, according to the complaint.

(Gose, 2006, p. 17)

SUGGESTIONS FOR FURTHER READING

Books

Berger, S. (2008). Understanding nonprofit financial statements (3rd ed.). Washington,

DC: BoardSource.

Bowman, W. (2011). Finance fundamentals for nonprofits: Building capacity and

sustainability. Hoboken, NJ: Wiley.

Coe, C. K. (2011). Nonprofit financial management: A practical guide. Hoboken, NJ: Wiley.

Herman, M. L. (2013). Ready … or not: A risk management guide for nonprofit

executives. Leesburg, VA: Nonprofit Risk Management Center.

McMillan, E. J. (2010). Not-for-profit budgeting and financial management (4th ed.). San

Francisco, CA: Wiley.

Weikart, L. A., Chen, G. G., & Sermier, E. (2012). Budgeting & financial management for

nonprofit organizations: Using money to drive mission success. Thousand Oaks, CA: Sage.

Websites

Commonfund: http://www.commonfund.org/Pages/default.aspx

Financial Accounting Standards Board: http://www.fasb.org/

Nonprofit Finance Fund: http://www.nonprofitfinancefund.org/

Nonprofit Risk Management Center: http://www.nonprofitrisk.org/

Companion Website

Visit study.sagepub.com/worth4e for access to certain full-text SAGE journal articles and links

to relevant video and multimedia content.

13 Philanthropic Fundraising 
Chapter Outline 
 Definitions and Distinctions 
 Motivations for Giving 
o Understanding Corporate Philanthropy 
o Foundation Giving 
o Motivations of Individual Donors 
 The Fundraising Process 
o Identifying Priorities and Developing the Case 
o Identifying and Qualifying Prospects 
o Cultivating Prospects 
o Soliciting the Gift 
o Acknowledging and Recognizing Donors 
o Stewarding the Gift and the Relationship 
 Individual Donor Life Cycles 
o Planned Giving 
 Campaigns 
 Managing Fundraising Programs 
o Advancement Services 
o Prospect Management 
o Fundraising Efficiency and Effectiveness 
o Staff Performance and Accountability 
 Ethics and Professional Standards 
 Chapter Summary 
 Note 
 
Hundreds of billions of dollars are given each year to nonprofit organizations by foundations, 
corporations, and individuals. 
Photo: Duncan Smith/Photodisc/Thinkstock 
Learning Objectives 
After reading this chapter, students should be able to: 
1. Define key terms and concepts related to fundraising and philanthropy. 
2. Summarize the primary motivations of corporate, foundation, and individual donors. 
3. Explain the fundraising process. 
4. Identify the advantages and disadvantages of various solicitation methods. 
5. Explain common planned giving vehicles and the types of donors to which each may be 
most attractive. 

6. Describe the characteristics of campaigns.

7. Define key terms and concepts related to management of fundraising programs.

8. Identify ethical issues related to fundraising.

9. Analyze cases, applying concepts from the chapter.

Fundraising is synonymous with nonprofit organizations in the minds of many people. They may

associate it with the flood of solicitation letters that fill their mailboxes around the holiday

season, some enclosing address labels, book markers, or other items from a charitable

organization. Or they may think of the charity golf tournament, tennis tournament, or some other

event in which they participate. Or, perhaps, they may think about the annual phone call they

receive from a student at their college or university, or a former classmate, asking for a gift to the

institution’s annual fund. Increasingly, they may think about fundraising appeals that they have

received through e-mail or an effort that one of their friends may have organized on a social

networking site. Indeed, charitable or philanthropic giving is an important source of revenue for

many nonprofits, although just how important varies considerably among subsectors.

For example, gifts provide a small portion of total revenues for health services organizations,

which receive most of their revenue from government or private payments for services provided.

In contrast, most religious organizations and many human services organizations almost entirely

depend on giving. Educational institutions and civic, social, and fraternal organizations are in the

middle—gifts are important, but so are government grants and payments for services provided.

But even for large institutions with substantial revenue from other sources, such as hospitals and

universities, private gifts sometimes have an impact disproportionate to their share of total

revenues, because they address organizational priorities rather than supporting specific programs

or services. For example, unrestricted giving may help support core operations or capacity

building, new facilities may require a combination of fundraising and borrowing, and new

initiatives that do not yet attract paying customers or grants may be financed through

discretionary dollars available to the CEO from endowment income or private gifts.

Although philanthropy in some form is common around the world, organized fundraising and

philanthropy on a massive scale is still primarily an American phenomenon. And massive it is. In

2013, an estimated $335 billion was given to nonprofit organizations by foundations,

corporations, and individuals. When philanthropy is mentioned, some people think about

corporate giving or perhaps the large national foundations, such as the Gates Foundation or the

Ford Foundation. But private individuals are overwhelmingly the largest sources of giving,

accounting for 72 percent of the total in 2013. The largest portion of giving by individuals is

directed to religion, which accounts for about one third of the total each year; however, even

when religious giving is excluded, individuals still account for much more than either

corporations or foundations in their impact on U.S. philanthropy. In 2013, corporations and

foundations accounted for about 5 percent and 15 percent, respectively, of total philanthropy

(Lilly Family School of Philanthropy at Indiana University, 2014).

Where does the money go? Next to religion, the largest recipient of philanthropy is education,

accounting for 16 percent in 2013, followed by human services (12 percent). Giving to create or

enlarge foundations accounts for another 11 percent of the total, followed by gifts to health (10

percent), and public benefit organizations (7 percent). The latter include organizations such as

United Way and Jewish federations, among others. Although they are important causes for many

people, the environment and animals and the arts, culture, and humanities receive relatively

small shares of the philanthropic pie, together accounting for 8 percent of total giving in 2013.

An important and growing component of philanthropy is bequests—that is, gifts made by

individuals through their wills or other estate-planning vehicles. Bequests accounted for 8

percent of total giving in 2013. With the aging of the population and the growing wealth of older

people, giving through bequests is expected to grow substantially in the coming decades (Lilly

School of Philanthropy at Indiana University, 2014).

Definitions and Distinctions

When the planes hit the World Trade Center towers on September 11, 2001, millions of

Americans went to their computers or reached for their checkbooks to give more than $2 billion

to help the victims and their families. Four years later, when Hurricane Katrina hit the Gulf

Coast, the response was again immediate and overwhelming, totaling more than $3.3 billion in

gifts to organizations providing relief and support for rebuilding (Lipman, 2006). When tragedy

struck again in 2012 with Hurricane Sandy devastating sections of the U.S. east coast, millions of

donors again responded generously. That same year, Facebook founder Mark Zuckerberg and his

wife, Priscilla Chan, gave nearly $500 million to the Silicon Valley Community Foundation, to

be used for education and health (“Facebook’s Mark Zuckerberg gives $500 million,” 2012).

And in 2013, Zuckerberg and Chan gave another $1 billion to the community foundation,

becoming the largest donors under age 30 in history (Bermudez, Daniels, & Wallace, 2013). In

2014, individuals gave over $100 million to the ALS Association in response to its ice bucket

challenge, a crowdfunding initiative that attracted participation from many celebrities, as well as

average people (Wolfman-Arent & Switzer, 2014). These examples demonstrate the scale and

impact of giving in the United States, but they also illustrate two different approaches to

giving—one focused on immediate needs and the other taking a more long-term, strategic

perspective.

In Chapter 2, this text made a distinction between charity and philanthropy as two types of

voluntary giving. Charityincludes gifts to meet immediate human needs, for example, to provide

food to those who are starving or shelter to those dislocated as a result of natural disaster—such

as the post-September 11 and post-Sandy outpouring of generosity. It is often impulsive and

always driven by human compassion. Philanthropy is giving to strengthen the infrastructure of

society, that is, to develop institutions that serve human needs or enhance human development

over the long run. The objects of philanthropy often include hospitals, universities, museums,

and arts organizations—institutions with missions that are perpetually relevant across

generations, but which do not have the same urgency as immediate human suffering. Some

philanthropic gifts, such as Zuckerberg and Chan’s, go to create or expand foundations, most of

which are established to last forever or a very long time, tackling long-term problems and issues.

Philanthropic gifts are made carefully and thoughtfully, often as the culmination of a long-

standing relationship with an institution. Emotion plays an important role in the decision to make

philanthropic gifts—certainly for individual donors, but many also reflect a highly rational

analysis that makes giving a form of investing in society and its important institutions. In

practice, many people use the terms charity and philanthropy as if they were synonymous or use

philanthropy as the broader concept, encompassing all voluntary giving. But the distinction is

important, and it is useful for nonprofit organizations to be mindful of how their donors may

think about their giving in these different ways.

The past 15 years have seen the rise of new concepts of giving, including venture

philanthropy, strategic philanthropy, catalytic philanthropy, and outcome-oriented

philanthropy. Each has a somewhat different definition—and various authors define them

differently—but the common element is encompassed by the latter term; it refers to philanthropy

in which “donors seek to achieve clearly defined goals; where they and [the organizations they

support] pursue evidence-based strategies for achieving those goals; and where both parties

monitor progress toward outcomes and assess their success in achieving them…” (Brest, 2012).

These are styles of philanthropy that emphasize the impact of gifts, and donors who follow them

usually intend to bring about change to address social problems—for example, poverty and

unemployment. These approaches may fall somewhere between charity and philanthropy as

those terms have been defined above. Unlike charity, this type of giving is not intended to

alleviate immediate human needs, for example, displacement by a natural disaster. Rather, like

philanthropy, it is long term in its perspective and is intended to build organizations that can

effectively address social needs. However, gifts from venture philanthropists are generally not

intended to sustain traditional institutions, such as universities and hospitals, but rather to build

the capacity of nonprofit organizations that work for social change and improvement of

educational and economic opportunity.

Before proceeding further, it is important also to clarify some other common terms that have

somewhat different meanings but are sometimes used interchangeably in everyday

conversation. Fundraising is an activity undertaken with the goal of eliciting charitable or

philanthropic giving. Fundraising is related to philanthropy as teaching is to learning; that is, one

is intended to accomplish the other, with no guarantee of success because the response lies

significantly within the power of the respondent to determine. In the simplest understanding,

fundraising means “asking for a gift,” although, as we will soon discuss, it is really a process in

which asking for, or soliciting, a gift is but one step in a more complicated process.

Many organizations have what’s known as a development office. Staff who work in that office

may be called development officers and have titles such as director of development. If asked

what they do, they are likely to respond that they are engaged in fundraising. The two terms,

fundraising and development, represent somewhat different concepts, although the difference is

not always maintained in common usage. Development is a term that originated in the 1920s at

Northwestern University (Worth, 1993, p. 6). The university had completed a

fundraising campaign to build a new campus. When the campaign was completed, they

determined that fundraising should be an ongoing, organized effort to continually improve

and develop the institution, rather than a sporadic activity undertaken now and then to meet a

specific need. The university created a new department to manage this ongoing effort and called

it the office of “development,” meaning “institutional development.” Although fundraising and

development became interchangeable over time, the latter is properly understood as a more

comprehensive approach to the long-term growth of an organization or institution. As I explain

in an earlier work,

Fund raising is but one aspect of a complex process involving the institution, its hopes and goals,

and the aspirations of its benefactors. Fund raising is episodic; development is continuous. Fund

raising is focused on a particular objective or set of goals; development is a generic and longterm

commitment to the financial and physical growth of the institution. Successful fund raising

requires a specific set of interpersonal and communication skills; development requires a broader

understanding of the institution and its mission as well as patience, judgment, and sensitivity in

building relationships over the long haul. A “fund raiser” is an individual skillful in soliciting

gifts; a “development officer” may be a fund raiser, but he or she is also a strategist and manager

of the entire development process. (Worth, 1993, pp. 7–8)

By the mid-1970s, however, the terms fundraising and development had become so

interchangeable in use that when the Council for Advancement and Support of Education

(CASE) was established in 1974, it adopted the new term institutional advancement to describe

the activities performed by its members. Institutional advancement, or just advancement,

encompasses not only fundraising or development but also the related activities of

communications, marketing, and other programs for constituent relations. In other words,

institutional advancement has a meaning similar to the original concept of development—a long-

term and broad-based program to build an organization or institution. In the decades since

CASE’s founding, “advancement” has been widely adopted by colleges and universities and also

has gained currency in nonprofit organizations more broadly. Ironically, it also has come to be

used synonymously with fundraising by many people.

Motivations for Giving

The question of what motivates donors is of obvious practical interest to nonprofit managers in

determining which of their needs may be met through philanthropy and in designing their

fundraising programs. But donor motivation is also a topic that has generated a substantial body

of research. Let’s look at motivation from the perspective of the three principal sources of

giving—corporations, foundations, and individuals. Although they are the largest source of gifts,

we discuss individuals last because their motivation is the most complex of these three types of

donors.

Understanding Corporate Philanthropy

Corporations make philanthropic gifts both directly and through foundations that some have

established as separate nonprofit entities. Using a foundation offers advantages over direct giving

by the corporation, including the ability to add resources to the foundation in highly profitable

years and then sustain a relatively even level of giving in years when the business may not be as

profitable. Corporations make cash gifts and also gifts of products, known as gifts-in-kind. But

corporations also support nonprofits through a variety of partnerships, which, as the term

implies, offer benefits to both the nonprofit and the business. These partnerships are sometimes

complex and represent a growing component of nonprofit revenue. Although they provide

financial benefit to many nonprofit organizations, they are not “philanthropy,” since the

company expects a financial return as well as a benefit to the nonprofit partner.

Corporate philanthropy is a relatively recent phenomenon. Indeed, prior to the case of A.P. Smith

Mfg. Co. v. Barlow in 1953, the courts imposed restrictions on corporate giving that did not

directly benefit the interests of shareholders or employees of the firm. This landmark case

opened the door to the concept of enlightened self-interest, that is, the idea that companies could

make gifts that might not have a direct or immediate benefit to the bottom line, but that would

generally help maintain a healthy society in which to do business.

Corporate giving generally increased during the decades of the 1960s, 1970s, and 1980s, and its

purposes often reflected the interests and affiliations of the senior executives and directors of the

company. However, during the 1980s and with increasing momentum in the 1990s and 2000s,

corporate giving became professionalized. Many companies created committees to make

decisions about where to direct the corporation’s giving or created separate foundations to

undertake philanthropy in the company’s name.

Since the mid-1980s, corporate giving has increasingly reflected an approach known as strategic

philanthropy—that is, giving according to a plan that relates the corporation’s philanthropy to its

overall strategic and business goals. Giving is viewed as an investment and is subject to

evaluation based on how much return it produces—the extent to which it enhances the

corporation’s competitiveness. For example, a corporation might target its giving in communities

where it plans to develop new facilities or to specific groups of people who are likely to be

customers of its products. The various corporate–nonprofit partnerships, which will be discussed

in Chapter 14, have evolved from the strategic philanthropy approach. Today, the line between

corporate philanthropy and marketing has become blurred, as has the line between fundraising

and negotiating business relationships. Indeed, in 2004, the Association of Fundraising

Professionals (AFP) amended its code of professional ethics, which had long required that

fundraisers not accept compensation based on a percentage of gifts, to include a similar

prohibition with regard to the solicitation of corporate partnership arrangements (Hall, 2005).

To understand the motivation for corporate giving, a nonprofit needs to understand the

company’s business plans and goals on which its program of philanthropy is likely to be based.

This is not to imply that corporations give in a way that is detrimental to the interests of

nonprofits or society or that their motivations should be viewed as invidious. And many

companies have principles of social responsibility to which they faithfully adhere. Nevertheless,

the realities do suggest that nonprofits begin their search for corporate dollars not in terms of

their own needs but rather with a view to how there can be a mutual benefit to the nonprofit’s

welfare and the interests of the corporation from which it seeks support.

Foundation Giving

It is not difficult to understand the motivations for giving by foundations. Very simply, that is

what they exist to do; indeed, it is what they are required to do as a condition of their tax-exempt

status. Foundations are required to expend a minimum of an amount equivalent to 5 percent of

the value of their invested assets each year, either for grants or operating expenses.

Foundations are created by corporations, individuals, or families and their activities generally

reflect the interests of the founders. Family foundations are a type of independent foundation in

which the board is dominated by members of the donors’ family. They often evolve as they

grow, expanding their boards beyond family members, employing professional staff, and

developing formal programs and guidelines that make explicit their interests and priorities. Many

foundations have geographic and other restrictions on their giving and have well-defined areas of

interest and grant programs through which they provide support, as illustrated by the example of

the Kellogg Foundation, shown in Box 13.1. It is usually fruitless for an organization to approach

a foundation for support if it does not operate programs related to the organization’s activities or

has policies and priorities that exclude the organization from consideration. Foundation priorities

may change from time to time; for that reason, Box 13.1 should be considered an example

obtained at the time this book was written, but not relied upon as current policies of the Kellogg

Foundation at the time it is being read.

Because foundations are rational donors, obtaining foundation support often requires preparation

of a written proposal. The art of doing so is often called grantwriting, although the seeker is

indeed writing a proposal, not a grant—the grant is made by the foundation, and if the grant is

“written,” the writing would be done by a foundation official. Proposal writing thus is a more

accurate description of what a nonprofit organization or a member of its staff does. This text

does not go into detail on the techniques of foundation proposal writing, but many good guides

are available, and organizations such as AFP and the Foundation Center offer training on the

topic. Box 13.2 provides an outline of a typical foundation proposal, although each must be

tailored to the guidelines and requirements of the specific foundation to which the proposal is

being directed.

Other types of foundations include operating foundations that support their own programs and

generally do not make grants to other organizations. And, as discussed earlier in this book, some

public charities use the term foundation in their names, although they both raise money and

distribute it, usually to a single organization or a defined community. Operating foundations

usually are not good fundraising prospects for other nonprofits, nor are most foundations that are

public charities, although some community foundations have discretionary funds that may be

available to nonprofit organizations in their areas.

BOX 13.1 KELLOGG FOUNDATION PRIORITIES

Kellogg Foundation Priorities

The W. K. Kellogg Foundation (WKKF) places the optimal development of children at the center of all we do and

calls for healing the profound racial gaps and inequities that exist in our communities. We believe in supporting and

building upon the mindsets, methods and modes of change that hold promise to advance children’s best interests

generally, and those of vulnerable children in particular.

Concentrating our resources on early childhood (prenatal to age 8), within the context of families and communities,

offers the best opportunity to dramatically reduce the vulnerability caused by poverty and racial inequity over time.

There is strong evidence that optimal child development means providing children with the stimulus, tools and

support necessary for their emotional, intellectual, physical and cultural growth. To achieve this, we organize our

work and investments toward attaining three strategic goals:

• Educated Kids: Increase the number of children who are reading-and-math proficient by third grade.

• Healthy Kids: Increase the number of children born at a healthy birth weight and who receive the care and healthy

food they need for optimal development.

• Secure Families: Increase the number of children and families living at least 200 percent above the poverty level.

Within and around each goal are commitments to Community & Civic Engagement and Racial Equity – because

both are necessary for communities to create the conditions under which all children can thrive.

We take a place-based approach to our work, concentrating as much as two-thirds of our grantmaking in a limited

number of specific places where we believe we can have maximum impact.

Source: W. K. Kellogg Foundation website (www.wkkf.org/what-we-do/overview).

BOX 13.2 SECTIONS OF A STANDARD GRANT PROPOSAL

• Title page and table of contents

• Executive summary—1 page

• Narrative

Statement of need—2 pages

Project description—3 pages

Organization information—1 page

Conclusion—2 paragraphs

• Budget

• Appendices and supporting materials

Source: Foundation Center (www.cohhio.org/files/pdf/08conference/Conf08pdf/09_Proposal_Writing.pdf).

Motivations of Individual Donors

As illustrated by the spontaneous response to 9/11, Hurricanes Katrina and Sandy, and the ice

bucket challenge, the motivations of individual donors are often more complex and less

calculated than those of corporations or foundations. Individual donors have been the focus of a

substantial number of research studies. In a 2011 review, René Bekkers and Pamala Wiepking

provide a comprehensive overview of the academic research on the topic to that time (Bekkers &

Wiepking, 2011). Most studies have examined characteristics that distinguish donors from non-

donors and have identified statistical relationships between giving and certain characteristics, for

example, age, gender, income level, and geographic location. Fewer have explored the more

complex question of donor motivation, to answer the question of why they give.

Traditionally, the literature has been divided between those who attribute giving to altruism—

those who say that individuals are driven by their nature to help others and improve the human

condition, and those who say that individuals give to obtain some benefit for themselves, perhaps

recognition, social position, or control. A 1994 study by Russ Prince and Karen File identified

seven motivational types that some fundraising practitioners find to be intuitively attractive.

According to these authors, the largest group of donors (26 percent) are “communitarians,”

motivated by the belief that giving makes good sense in terms of a better community for their

businesses and lives. Another 21 percent are the “devout,” who give because of their religious

beliefs. The third-largest group is the 15 percent that Prince and File call “investors.” These are

donors who are particularly concerned with the tax and estate benefits of giving and will be

interested to know exactly what result will be accomplished with their support. “Socialites,” 10.8

percent of donors, give because it provides opportunities for social interactions; they are often

people who will attend charity events. The “altruists,” the selfless donors who may give without

any desire for recognition, comprise another nine percent. “Repayers,” who give based on

gratitude for benefits they have received, make up 10.2 percent. The final category, the

“dynasts,” are people who give because it is a family tradition; they constitute another 8 percent

of donors (pp. 14–16). Different types of donors gravitate toward various nonprofit subsectors;

for example, the devout tend to support religion, the socialites give to arts organizations, and

repayers often direct their support to universities and hospitals that may have influenced their

own or their family members’ lives.

In the early 2000s, Paul Schervish and John Havens of the Social Welfare Research Institute at

Boston College studied social-psychological factors influencing the giving of wealthy

individuals and identified several “dispositions” or “inclinations” that motivate individuals to

engage in significant philanthropy. These inclinations include “hyperagency,” the ability to make

history and affect the conditions under which people live; “identification,” the unity of self-

regard and regard for others; and consideration of income and estate tax benefits. The authors de-

emphasize the impact of tax incentives, arguing that their data suggest that as wealth increases,

individuals gain a preference for leaving their estates to charity rather than to heirs. They

speculate that removal of estate taxes thus would result in more money becoming available for

bequests to nonprofit organizations (Schervish & Havens, 2001).

The influence of tax incentives on giving is controversial. In self-reports by donors, the

importance of the charitable deduction is often minimized. For example, in a 2011 study

conducted by the Center on Philanthropy at Indiana University (now the Lilly Family School of

Philanthropy) and Bank of America, 50 percent of survey respondents indicated that their giving

would stay the same even if they received no tax deduction. Fewer than 10 percent indicated that

their giving would decrease dramatically if the deduction were eliminated (Center on

Philanthropy at Indiana University, 2012). But research tells a somewhat different story. Based

on a meta-analysis of studies over 40 years, John Peloza and Piers Steel (2005) acknowledge a

lack of consensus, but conclude that “changes in tax deductibility indeed appear to have a

marked effect on charitable giving” (p. 269). Some studies addressing this topic may be flawed

because they ask people to say what they would do under certain hypothetical circumstances

rather than analyzing data reflecting actual past behavior. People are often inclined to give what

they think to be the right or appropriate answer, which may or may not predict what their

behavior would actually be under the hypothetical circumstances described. For example, when

asked if we would wait for a red light in the middle of the night when the police are not in sight,

most of us probably would answer yes. But what some might actually do could differ from this

appropriate response to the question. In other cases, the survey question may relate to a public

policy issue, for example, tax rates. People responding to the question may view it as an

opportunity to influence the policy debate and their answers thus may reflect their opinions more

than they predict what their actual behavior might be under different conditions.

The mathematics of giving and taxes suggests that tax rates may influence the amount that

individuals are able to give, regardless of what their desire to give might be. For example,

assume that an individual in a 35 percent income tax bracket makes a gift of $1,000 that is tax

deductible. Because of the deduction, the donor’s income is reduced by $1,000, which reduces

his or her income tax bill by $350 below what it would otherwise have been (35 percent of

$1,000). That makes the out-of-pocket or actual cost of the $1,000 gift $650, since there is a tax

savings of $350. Now, assume that the donor’s tax rate has been reduced to 10 percent. The

$1,000 gift now saves $100 in taxes, making its out-of-pocket cost $900. Although it may seem

counterintuitive, a lower tax rate increases the cost of a gift. Depending on donors’ overall

financial position, this could have the effect of making it more difficult for them to give as much

as they otherwise might have been able to, regardless of how highly motivated they might be to

give.

The preponderance of research suggests that the motivations of most individual donors are

mixed, including some combination of altruism and self-interest, and that tax policies have an

impact on the amount that individuals are able to give, whether during their lifetimes or through

their estates on their death. But both questions are likely to remain controversial and the focus of

future research.

With the increasing diversity of the American population, a number of studies in recent years

have examined the particular giving traditions and patterns of various groups, including women,

African Americans, and Hispanics/Latinos. The topic is of increasing interest to many

nonprofits, as greater wealth is being accumulated by women and members of minority groups.

Students will find additional reading on this topic suggested at the end of this chapter.

The Fundraising Process

Some people may think of fundraising as synonymous with asking for money, but it is indeed a

process with identifiable stages and steps. Without following the process, fundraising is random

and not really very different from standing on a corner with a tin cup, hoping that some passerby

will drop in a few coins. That is not an approach that is likely to generate the substantial and

continuing support needed to sustain an organization.

The fundraising process is depicted in Figure 13.1 and includes six basic steps. Once an

organization has (1) identified its priorities for financial support and developed a case to justify

its goals, it must (2) identify the prospects most likely to give. (3) A process

of cultivation develops a relationship between the organization and the prospect and, at the

appropriate point in the relationship, (4) the prospect is asked for a gift. (5) The gift is

acknowledged and the donor is recognized. (6) The organization then works to

properly steward the gift, keeping the donor engaged and informed of what it has accomplished

with the support provided. The process is usually described as a cycle because effective

fundraising programs seek to develop a base of donors who continue to give on a regular

basis. Stewardship is really part of the process of continued cultivation of donors who may

provide additional, and it is hoped increased, support in the future. Let’s walk through each step

in the process in greater detail.

FIGURE 13.1 Fundraising Process

Identifying Priorities and Developing the Case

Fundraising without a purpose is unlikely to elicit support. As Thomas Broce (1986) writes in his

classic book, “Donors give gifts to meet objectives, not simply to give money away” (p. 19).

This reality requires that an organization base its fundraising on identified priority needs related

to achievement of its mission and rooted in a plan for its future growth and improvement.

Strategic planning is often the first step in setting the organization’s vision and goals for the

future, which then can be translated into specific fundraising objectives with a rationale for why

the support will enhance its ability to achieve its social mission.

The organization must develop a case for support, or a rationale for giving, that goes beyond its

own needs and links its goals to broader social and human purposes. An organization’s leaders

may be convinced of its worthiness and the importance of its financial needs. But in a

competitive philanthropic marketplace, they must make the case for how support for its purposes

will bring a greater benefit than a gift to another organization or cause. For example, Box

13.3shows a summary of the case for the hypothetical Siwash College that is based entirely on

what its faculty and students perceive to be important to them and on the institution’s self-

interest. The needs may be real, but this statement is unlikely to inspire many donors to sacrifice

in order to address them. In contrast, the second case explains Siwash’s need for philanthropy in

relation to social justice and economic prosperity, helping place its needs in a broader context

and appeal to the values and emotions of potential donors.

The case for support is the reason the organization seeks support, derived from its mission and

values—it is the answer to the questions, “Why should I give to this organization?” and “Why is

this cause more important than others that also ask for my support?” It is often expressed in

a case statement, a document that may include a comprehensive discussion of the organization’s

fundraising objectives and the justification for each. Case statements may be developed to

provide a resource within the organization (an internal case statement) or as a printed brochure

or electronic document for use in communicating with donor prospects (an external case

statement). It is also common to produce a video, which expressed the case statement in a visual

format. But the product known as the case statement should not be confused with the idea of the

case. An organization that rushes to produce a glossy brochure or website without careful

thought about the essence of its case is unlikely to successfully address the motivations of

donors, whether corporations, foundations, or individuals.

BOX 13.3 THE CASE FOR SUPPORT

Siwash College Case #1

The College’s enrollment has increased in the past decade, resulting in crowded classrooms and inadequate office

space for the faculty. Colleges are competing for the best students with offers of scholarship support. We now have

fallen behind our competitors in the quality of our facilities and the amount of financial aid that we can provide. We

are losing many of the best students to other institutions. For this reason, we are seeking $10 million in funds for

new campus construction and scholarships that we will offer to the students from our region who have the highest

SAT (Scholastic Aptitude Test) scores.

Siwash College Case #2

The United States always has been a nation of economic opportunity. Today, as we face great challenges from

global economic competition, the talents of too many young men and women are undeveloped because they lack the

financial means to attend college. College tuition has risen dramatically, and financial aid has not kept pace. This is

unjust and threatens America’s future economic prosperity. Educational opportunity always has been fundamental to

the mission and values of Siwash College. The Board of Trustees has established a plan to maintain our tradition by

expanding enrollment and providing additional scholarship support for worthy young men and women of our region.

To that end, we seek $10 million in support to expand our facilities and increase scholarship support to promising

and worthy students.

Identifying and Qualifying Prospects

Just as an individual seeking a marriage partner likely would not do well by calling people at

random or by proposing to strangers on the street, an organization seeking gift support needs to

focus on prospects who offer a better-than-average chance of giving. Otherwise, its time and

fundraising resources will be allocated inefficiently and ineffectively. The identification of

prospects begins by limiting the search to those who have the financial ability or capacity to

give. Obviously, an individual or company in bankruptcy or a foundation that has already

allocated all its resources would not be worthy of further attention. They might have a keen

interest in the nonprofit, but their financial inability would preclude considering them as

prospects. However, making a list of successful companies and wealthy individuals still does not

provide likely prospects for a particular nonprofit; it would be a large list and include many who

are remote or already deeply committed to other causes. It would be like making a list of

marriage prospects that included every single person in the world; they might have the ability to

consider marriage, but it would still be a fruitless task to send proposals to all of them. The list

would need to be culled by some additional criteria. For example, it might help to limit the

search to people with whom the marriage seeker already has some connection—maybe

schoolmates, individuals who attend the same church, or friends of friends. And, being single

does not automatically imply a desire to be married, so it would be wise to limit the list of

prospects to those who may have indicated some interest in getting married. (It is instructive

to observe that online dating sites do provide tools for screening a large pool of people in order

to identify those with the ability and desire to marry and who have some interests in common

with the searcher—the matching is not random.)

Like marriage prospects, the most likely prospects for charitable gifts will be those who have not

only the ability to give but also some linkage to and interest in the organization or the area of

activity in which it is engaged (Seiler, 2011, p. 15). A prospect is described as “qualified” only

when both financial capacity and potential interest have been determined. Identifying

individuals, foundations, and corporations who are prospects is a task often performed by

professionals engaged in prospect research, a specialty increasingly in demand by nonprofit

organizations with sophisticated fundraising programs. Prospect researchers have a variety of

tools and techniques, including a growing array of electronic databases, to help narrow the list to

those with the greatest likelihood of making a gift to their organizations. Financial ability may be

easily determined for foundations, on which information is readily available in published

sources. Corporations may be somewhat less easily assessed, but some indication of ability to

give may be assumed from revenue and profits. Individuals present more of a challenge.

Although public information can help determine levels of income and wealth—for example, real

estate values—much of the wealth will be less visible.

Linkage to the organization may occur in a variety of ways. Volunteers, graduates, and former

patients or their families have obvious connections to the organization that have served them.

But other types of nonprofits may need to build their network of prospects in a pattern similar to

concentric circles, beginning with those who are already part of the organization’s inner circle of

friends and donors, then moving outward to less connected members of the community. The

organization’s governing board is its principal link to the outside world and, absent an easily

identifiable constituency of potential donors with direct linkage, board members’ efforts in

identifying and engaging prospects among their own business and social contacts may be

important.

Interest may be relatively easy to determine for a foundation, if it provides a clear statement of

its priorities. Some corporations that have formal giving programs offer similar clarity about

their interests, while in other cases, interest may be presumed because the company’s business

activities bear a close relationship to the work of the nonprofit. For example, a home builder or a

mortgage lender may have an interest in the issues of homelessness and affordable housing;

similarly, companies that manufacture products for use by women are often among the most

prominent contributors to nonprofits that address women’s issues or diseases. For individual

prospects, interest may be revealed by past gifts to the organization or perhaps gifts to another

organization addressing similar issues or needs, but often an individual’s interest can be

determined with confidence only through personal contact and discussion.

Cultivating Prospects

To invoke again the metaphor of courtship, most people would not consider proposing marriage

on the first date. The odds of such a proposal gaining a positive response are increased if some

time and effort have been devoted to cultivating a relationship, perhaps involving smaller steps

such as having dinner and going to the movies. A nonprofit cultivating a prospective donor

likewise will increase the chances of gaining support if it devotes some time and attention

to cultivating a relationship before moving to solicit a gift. The larger the amount of the gift to be

solicited, the greater the investment that will need to be made in cultivation of the relationship in

advance of asking.

In fundraising for small gifts, solicitation may not require significant cultivation; for example,

very little cultivation precedes broad-based solicitations by mail, phone, or the Internet.

However, fundraising for major gifts involves developing and executing a series of planned

initiatives expected to move an individual toward a closer relationship with the organization,

leading to support. Major-gift fundraisers manage and track such activity through what are

known as moves management systems. A moves management system includes electronic systems

but also manual methods and processes for tracking contacts with prospective donors to ensure

that cultivation of relationships occurs in a planned and strategic manner.

Soliciting the Gift

Nonprofit fundraisers have an array of techniques available for soliciting gifts, and a full

discussion is beyond the scope of this chapter. Box 13.4 provides a summary of some commonly

used methods and the advantages and disadvantages of each. In general, the more personal the

contact, the more effective it is. Personal solicitations and mail, e-mail, or phone solicitations

that include a message tailored to the individual being asked are more effective than

communications that are very impersonal, such as broad-based mailings and telemarketing calls.

On the other hand, direct mail remains a popular method of soliciting gifts and provides

something tangible—a letter and/or a brochure—that an individual may retain and reread

sometime after its receipt. This may be an advantage over e-mail, which many people skim and

delete. The selection of methods employed by a nonprofit depends on several considerations.

First, the method used must be appropriate to the level and type of support that the organization

needs. Soliciting by direct mail, by phone, or through e-mail may be appropriate to secure a large

number of relatively small gifts on a recurring basis to support the current operating budget. But

major gifts to address capital or endowment needs will require personal contact and time for a

full discussion of the organization’s plans and the purpose that will be achieved through the gift.

If the gift being solicited is for the organization’s endowment, the personal contact with the

prospective donor may need to be prolonged, in order to fully explore the individual’s desires

about his or her legacy to society beyond his or her lifetime. The use of social media and

crowdfunding may be effective in raising funds for one-time projects that generate excitement,

but are not assured to produce the ongoing support on which many organizations rely. Most gifts

made in response to a challenge from friends or celebrities are likely to be relatively modest, not

major gifts.

A second, related consideration is the costs and benefits of the method selected. Personal

solicitation, by fundraising staff or volunteers, is generally more effective than solicitation by

phone, mail, or e-mail, but it may also require a substantial commitment of time by the CEO, a

development officer, and perhaps a volunteer; it may also involve costs for travel. Personal visits

are to be reserved for the most promising prospects for the largest gifts. Personalized letters are

generally more effective than impersonal, “Dear Friend” letters, but they also require more labor

or more sophisticated technology to produce. The expected better returns always need to be

balanced against the costs of a particular method. Third, an organization needs to consider what

resources are available to it at particular points in its organizational life cycle. For example, a

nonprofit that has little visibility, no clear donor constituency, and a fundraising program that is

just beginning, may find special events to be a useful method for engaging new people,

increasing its visibility in the community, and raising some funds. Fundraising or benefit events

are not an especially effective way of raising money, and the costs of producing them may in fact

consume much or all of the gross revenues. But if they can be used as a strategy for developing a

new group of interested friends who may later be solicited for gifts through more effective

methods, including mail, phone, and personal contact, then they may play a useful role in a

comprehensive fundraising strategy.

Fourth, the nonprofit organization should adopt the solicitation method that is most likely to

reach its target audience. For example, direct mail is effective with older donors, who have time

to read letters and may be uncomfortable with providing credit card information on the telephone

or over the Internet. Events or the Internet may be a better way if the organization is hoping to

reach younger donors, who may not respond to direct mail or have land lines that make it easy to

obtain their phone numbers for telemarketing calls.

Again, the organization’s position in its life cycle is important to consider and will determine the

type of philanthropy that can be attracted. For example, a young organization, perhaps with a

somewhat uncertain future, would be unlikely to attract significant bequests for its endowment.

Many people would question whether it would use such gifts effectively or whether it provides a

lasting purpose for their philanthropy. However, a well-established nonprofit that continues to

raise funds through events and e-mail and does not solicit larger gifts is not maximizing its long-

term revenue potential. In other words, the methods used to raise funds, and the purpose for

which they are raised, must match the realities of an organization’s financial needs and

philanthropic market—or, as architects say, form should follow function.

BOX 13.4 COMMON SOLICITATION METHODS: ADVANTAGES

AND DISADVANTAGES

The Web, E-mail, Social Media, and Social Networking

Direct mail remains the primary source of gifts and of new donors. But giving online is growing

at a rapid pace. The most common method of online solicitation is e-mail. The purpose of the e-

mail is to drive donors to the organization’s donation page. This page may be maintained by the

organization itself or it may be operated by an outside vendor, such as Network for Good

(www.networkforgood.org), which provides back-office support for processing online gifts.

Soliciting gifts through e-mail follows many principles that are similar to those for direct mail. It

starts with list development and requires continuing attention to list maintenance. The list can be

grown by including every contact with the organization. As in direct mail, e-mail lists can be

segmented to deliver personalized messages and costs can be very low. However, as with all

methods, there are disadvantages, as well, including the use of spam filters and the ease with

which prospective donors can delete a message from their crowded inbox without opening it.

Many organizations make effective use of e-mail to stay in touch with current and past donors

and even to discuss or negotiate the terms of a major gift. But such gifts will generally require

some other form of contact, usually in person, with e-mail being used as a device to continue an

ongoing discussion (Network for Good, 2014).

A growing number of nonprofit organizations are using social media and networks as tools for

communicating, building a constituency, and advocating a cause. Some are also benefitting from

fundraising events organized on social networking sites and the capabilities of social networking

sites are expanding, suggesting that they are likely to become more important tools for

fundraising in the future. Social net working is especially effective in peer-to-peer fundraising, in

which friends invite friends to participate in such activities as walks and runs. But for most

nonprofits, social networking remains more important for communication and building a

constituency than for fundraising (Held, 2014). In 2014, it was reported that only 1 percent of all

funds raised online was attributable to social media, including Facebook (Held, 2014). But this is

not to suggest that organizations can minimize the importance of having a presence on social

networking sites, including Facebook, Twitter, and others. As Julie Dixon and Denise Keyes

(2013) emphasize, social networks enable individuals to become advocates, or “cause

champions” for organizations and causes, bringing value beyond their own giving. And, again,

fundraising through social networks is likely to grow as the capabilities of those networks are

expanded.

Crowdfunding sites have received increasing attention. They include sites such as Kickstarter

(www.kickstarter.com), which enables individuals to support creative projects, and Donors

Choose (www.donorschoose.org), through which individuals can support specific needs of

classroom teachers. Other well-known sites include CauseVox (www.causevox.com), Fundly

(fundly.com), Razoo (www.razoo.com), and indiegogo (www.indiegogo.com); all have unique

features. These sites have proven effective in raising funds for projects, but may be less useful

for developing ongoing support. For example, a campaign on indiegogo in 2012 raised almost

$1.4 million to build a museum in honor of electricity pioneer Nikola Tesla (Bray, 2013, p. 104).

Crowdfunding also may be a less effective method for soliciting major gifts.

In order to be successful, a crowdfunding appeal needs to go viral. That may only occur if it is

something especially exciting or urgent. If the organization intends to raise the funds from its

established constituency, then other strategies may be more effective in reaching them.

According to Ilona Bray (2013), crowdfunding may be an effective strategy only under specific

circumstance, including the following:

 [The organization] has a particular, tangible goal in mind, such as a new piece of

equipment; a trip to project site; medical care for an individual; production of a film; or a

time-delineated concept around which to fundraise, such as a matching grant …

 [The organization] can confidently predict that the goal is sufficiently exciting, moving,

or fun that [its] existing supporters and social media contacts will tell their friends about

it and they, despite knowing little to nothing about [the] organization, will be moved to

pitch in.

 [The organization] has the skills to present the idea in an attractive way, preferably

complete with photos, graphics, and videos.

 [The organization] has supporters who will create tangential pages connected to [the]

nonprofit’s master page (as is allowed on some sites), on which they ask friends and

connections to give. (Bray, 2013, pp. 104–105)

Some nonprofits also have used mobile communication as a method for soliciting and receiving

gifts. For example, texting was a significant component of giving to the Red Cross following the

earthquake in Haiti in 2010. Until recently, gifts made through text messaging were limited by

the service carriers to relatively small amounts, usually $10 to $25. That has limited the potential

in all but the most visible causes, for example, disasters that received worldwide attention.

However, some charities have used mobile giving as a method in connection with events and

have devised methods for permitting donors to text pledges of major gifts, to be charged to their

credit or debit cards (Flandez, 2012a).

The technology of fundraising is in transition. It seems likely that an increasing proportion of

dollars will come through online and mobile giving in the years ahead, but the traditional

methods of direct mail and phone calls remain important; indeed, these methods remain the

backbone of fundraising for many organizations. The continuing effectiveness of direct mail,

along with the growing importance of online giving, suggests that nonprofit organizations need

to pursue a multichannel strategy, combining new technologies with traditional methods. For

some, the costs of doing so may be daunting, but there may be little choice except to invest in

growing new technologies while also maintaining traditional programs in order to meet current

fundraising goals. It is essential that the use of various channels be integrated, as illustrated in the

sample fundraising plan in Box 13.5.

BOX 13.5 SAMPLE ONLINE FUNDRAISING PLAN

This is a sample plan for an imaginary local animal rescue organization called Save the Animals (STA), which is

trying to take their outreach efforts online to become well known in the community. While the specifics of your

online fundraising plan will be unique for your organization, the overarching themes will likely be similar. This

intensive plan calls for a relatively high budget, but you will likely want or need to dedicate much less.

The goals of this online fundraising plan are to

• Open an online channel of communication with direct mail donors who want it

• Acquire new online donors

• Cultivate and resolicit existing and new online donors

The key to acquiring new online donors will be developing partnerships to drive traffic to our site, building a large

e-mail list for prospecting, and making our site even more successful in converting visitors into donors. In addition,

we’ll expand the opportunities for raising money elsewhere online. At the same time, we will use our direct mail

(and telephone) program to offer online communications to those donors and to integrate online communication with

other fundraising communications.

1. Website

Our site should be a major tool in engaging and interacting with new and existing donors, while still meeting the

needs of our various other constituencies—people seeking to adopt, kids, animal lovers, etc. Some of our donors

also probably visit our site now and then, so it needs to demonstrate to them that they’ve invested wisely. They

should see offline fundraising themes reflected on the site, new content, things to do, compelling features, etc. Many

new people will also visit our site simply to look at the animals, without any intention of adopting. We’ll need

online mechanisms to engage those people and to turn them into donors. Here’s what we’ll do to make that happen:

• We’ll redevelop our site to improve its look and feel and increase its functionality.

• We’ll focus on finding vendors and/or application service providers (ASPs) who offer easy-maintenance solutions

to reduce the burden on staff. Then, we’ll work to make our site more appealing to our various constituencies with

interactivity (surveys, contests), news, compelling appeals, easy event sign-ups, and new features such as e-cards.

• We’ll maximize our giving opportunities on the site and give them high visibility on our homepage and other

pages, especially our most visited pages and those pages that tend to evoke strong emotions (animal pages).

• On an ongoing basis, we’ll monitor opportunities for promoting STA’s work online in the context of animal-

related news and our many events.

2. E-mail marketing

• We’ll develop an e-mail outreach program for communicating regularly with donors and prospects. The program

will initially include a monthly e-newsletter with donor and non-donor versions and occasional action or event

alerts. Eventually, we’ll build in targeted e-mail messages for people with expressed interests in certain subjects

such as no-kill policy, dogs, feral cat care, etc., and deliver e-mail renewals for existing online donors; and

solicitations and special appeals for both existing donors and prospects.

• We’ll develop and implement strategies for building our e-mail list. In addition to offering simple e-mail sign-ups

on our site, we’ll design creative ways to build our prospect e-mail list through incentives, such as offering a chance

to win a gift certificate to a local pet store for people who subscribe to our e-newsletter.

3. Increasing site traffic

With a compelling website and technology in place to manage content and donor relationships, we’ll develop

campaigns to drive traffic to our site. We’ll work to improve our search engine and directory rankings and links,

create and run campaigns on our site and elsewhere, and develop corporate partnerships and sponsorships to drive

traffic to our site. Strategies will include:

• Finding an appealing, easy-to-remember URL

• Increasing our visibility on our … corporate partners’ websites through links, banners, and special campaigns

• Promoting our site as a no-kill information center by disseminating (free) content, tips, facts, and interactive

devices to other sites with links back to our site

• Promoting our fundraising campaigns on media sites. We’ll develop graphics and try to place them free on

national, regional, and local media sites.

• Promoting our events online through event listing services such as CitySearch.com, local media listings, and others

• Maximizing our search engine rankings by improving our meta tags, utilizing keywords, and paying for increased

rankings at some sites

4. Special Campaigns

We’ll run a few targeted online campaigns throughout the year: one in December, and one in the spring.

• The December campaign will have a holiday focus with special holiday giving opportunities (gift memberships,

with the calendar as one of its features) and also drive traffic to our store.

• The spring appeal will be combined with a no-kill (or other issue) awareness campaign with special Web pages

and a strong tell-a-friend element. While it will have a fundraising element, the focus of this campaign will be to

build our online reputation and our e-mail list.

5. Integration with Direct Mail

• We’ll use traditional communications channels to build our donor e-mail list and promote our website.

• We’ll send a cultivation mailer to our lapsed donors inviting them to visit our website. We can direct them to a

special page on our website that makes an appeal for why they should make another gift.

• As our e-mail list grows, we’ll test ways to use e-mail to boost response to direct mail, such as

– Sending a pre-mail e-mail that tells people that they’ll be receiving an important letter in the mail or invite people

to respond

– Sending a post-mail e-mail that says, “We hope you received our recent letter. If you haven’t had a chance to give

yet, please give online today. It’s fast, easy, and efficient.”

• We’ll promote some online services in our direct mail—especially our store during the holidays.

• We will develop a persistent program for gradually gathering the e-mail addresses of direct mail donors who want

to add e-mail to their communications with us. We will test asks in the direct mail (P.S., buckslip, reply device, etc.)

and track response to find the most effective and least expensive ways to gather e-mail addresses without depressing

gift response. We’ll send test and track communications and resolicitations to these donors.

6. Tracking, benchmarking, reporting

• We’ll evaluate the e-mail messaging program by tracking the number of recipients that are converted into new

donors and the number of gifts and renewals received from existing donors in direct response to an e-mail

solicitation. We’ll also carefully monitor the overall giving levels of donors receiving the e-news versus donors not

receiving the e-news to evaluate the e-news as a cultivation tool.

• We’ll evaluate our site traffic to determine which content is most appealing and increase the visibility of that

content, as well as tie in giving opportunities.

Source: Adapted from Network for Good. Retrieved from www.fundraising123.org/print/182. Used with permission

of Network for Good. Network for Good provides nonprofits with fundraising tools and training to help

organizations raise more money online.

Acknowledging and Recognizing Donors

Well-managed development offices acknowledge gifts promptly, and most tailor the

acknowledgment to the level of the gift or status of the donor. For example, donors of gifts above

a certain level may receive a letter or e-mail from the CEO, while others may receive a letter or

e-mail from the director of development, and small gifts may be acknowledged only with a

preprinted paper or online receipt. Nonprofits are required by law to provide and donors are

required to have a formal receipt in order to deduct cash gifts of $250 or more from their taxes.

Additional rules apply to the substantiation of the value of gifts-in-kind.

Recognition of donors may include listing their names in an annual report or on the website,

including them in special recognition societies according to the level of the gift, and displaying

their names on plaques or wall displays. Larger gifts may be recognized through the naming of

facilities or endowment funds. While some donors may request anonymity, most appreciate

tasteful and appropriate recognition, which itself becomes a part of the process of cultivation for

the next gift.

Stewarding the Gift and the Relationship

The stewardship of past donors is an activity that has received more attention in most

development offices in recent years. Experience suggests that past donors are the best prospects

for future gifts, and it is therefore important to continue building their relationship with the

organization after a gift has been made. The concept of stewardship can have two meanings. The

most common usage encompasses the activities that the organization undertakes to keep the

donor informed and engaged. These may include recognition, sending reports about the impact

of the gift, and developing events to strengthen donors’ involvement and knowledge about the

organization’s activities. It is essentially the cultivation of current and past donors with an eye

toward future support. The second meaning of stewardship is more substantial, relating to the

organization’s responsibility to manage the gift according to the donor’s intention, that is, to

keep faith with the donor. This is especially important with gifts made to endowment, which are

invested in perpetuity to produce income supporting current programs. Many organizations have

developed regular written reports to endowment donors, informing them of the fund’s financial

performance as well as the activities undertaken with the income it produces. Some have

developed websites where donors can receive updated information on the impact of their gifts;

for example, they can read the biographies of students who are receiving scholarships that the

donors have funded. In addition, recent legal cases involving claims by donors or their heirs that

gifts are not being used as originally intended have caused nonprofit organizations to exercise

greater care in documenting the mutual understandings of the donor and the organization in

formal, written gift agreements.

Although the previous discussion has mostly involved individual donors, it is important to note

that the fundraising process is the same even if the donor is a corporation or a foundation.

Corporate and foundation philanthropy may be more professionalized, and giving decisions may

be made more objectively than they are by individuals. It is still essential to identify likely

prospects based on ability, linkage, and interest; to cultivate the prospect’s interest; to solicit the

gift in the appropriate manner at the appropriate time; to acknowledge the gift and recognize the

donor; and to steward the gift and the relationship with the donor for the long run.

Corporate and foundation giving patterns may change over time as their strategies are redefined.

They are less likely than individuals to develop an emotional connection to an organization and

become regular, long-term donors. Indeed, while the individuals working in a corporation or a

foundation may have personal feelings about the organizations it supports, the corporation or

foundation itself is not a living thing capable of such relationships. Corporations and foundations

thus support an organization so long as its activities are consistent with their goals—there is

inevitably a quid pro quo element to their giving—and many limit their support to specific

programs or activities and do not provide unrestricted gifts that can be used to meet general

operating expenses, undertake capacity building, or address other organizational goals. Second,

corporations and foundations are not mortal. Unlike individuals, they do not consider their giving

over the course of an expected lifetime; they do not write wills or plan for the disposition of their

estates. Understanding the giving behavior of individuals requires analysis of how they view

their philanthropy at various points in their lives and how they develop giving relationships with

favored nonprofits over time. Working with corporate and foundation donors requires many of

the same principles as working with individuals, but it is also essential to understand the

differences discussed earlier.

Individual Donor Life Cycles

The fundraising pyramid is a classic depiction of how individuals are believed to develop their

giving relationship with an organization. It is a standard element of fundraising training and has

been a part of fundraising theory for many decades. Depicted in Figure 13.2, the pyramid is

broader at the base and narrows as the level of gift increases going toward the top, because a

smaller number of donors will ascend to each successively higher level. The organization’s total

constituency, that is, its database of prospects, contains the largest number and is thus the widest

part of the pyramid. Some, but not all, prospects will provide gifts to its annual fund—gifts to

support current operating needs. Of those who do support the annual fund, some, but not all, may

respond to special needs of the organization by making a major gift. The definition of a major

gift will vary among organizations, depending on the overall levels of support they receive, but

such gifts typically are at least five figures or more and are often pledged to be paid over a period

of three to five years. Major gifts often come from the individual’s assets rather than current

income, and many are paid using securities, real estate, or other marketable assets. Some, but

only a few, of those who make major gifts will eventually make a principal gift to the

organization. The term principal gift has entered the fundraising vocabulary only within the past

two decades. Like major gifts, principal gifts are defined by their size—they are large major

gifts. These are the transformative gifts that have a significant impact on the organization, and

they may total in the millions of dollars.

FIGURE 13.2 The Fundraising Pyramid

David Dunlop, a thoughtful fundraising practitioner with Cornell University for many decades,

defined many of the terms used in major gifts fundraising. He identifies three types of gifts that

people make, and they generally correspond with the annual, major, and principal gifts depicted

in the fundraising pyramid. In Dunlop’s (1993) terminology, regular gifts are the ones that

people make on a recurring basis, usually to support the annual fund. Dunlop’s special gifts are

those that individual donors make to meet some nonrecurring need of the organization, for

example, a capital project or perhaps a campaign to increase the organization’s endowment

assets. They are stretch gifts, meaning that giving them requires some real sacrifice on the part of

the donor. Some individuals who make regular gifts and periodically stretch to make special gifts

will develop a lifelong relationship with a nonprofit organization, making it the beneficiary of

their ultimate gift. In Dunlop’s definition, an ultimate gift is not necessarily the individual’s last

gift, but rather “the largest gift that the person is ultimately capable of making” (p. 98). Some

individuals make their ultimate or largest gift while living; others make their ultimate gift in the

form of a bequest or other charitable provision that takes effect on their death. It is not unusual

for ultimate gifts to be made to endowments, usually to large nonprofits such as universities and

museums or to establish or enhance a foundation created by the donor.

Although the fundraising pyramid has been used for a long time to show how individual donors

develop their relationships with favored organizations and as an analytical tool to describe the

outlines of an organization’s donor constituency, some question whether its principles still apply.

Many donors today are entrepreneurial donors, and many of them are relatively young

individuals who have made their fortunes as business entrepreneurs. They tend to approach

giving like investing, preferring to fund organizations that are engaged in cutting-edge

approaches rather than traditional programs. They wish to be actively involved in an organization

rather than be a passive donor. They may select organizations based on their demonstrated

performance rather than on the basis of traditional loyalties. Their first gift may indeed be a

major gift if it supports a program of particular interest to them and one that is consistent with

their own social values.

To the extent that there is a new generation of philanthropists whose behavior is markedly

different from that of previous donors, the traditional fundraising pyramid may have less

validity. However, many of the new donors are also relatively young people; what has changed is

that wealth is now held by individuals at earlier ages than in the past. Whether their giving

behavior will become more traditional as they age is a question to which there is yet no answer.

It is also possible that individuals will engage in both traditional and new philanthropy,

following the patterns suggested by the pyramid for some of their giving but engaging in more

investment-like giving as well.

Another criticism of the fundraising pyramid is that it describes a situation most applicable to

large nonprofit institutions, such as universities, and that it is less relevant for smaller nonprofits.

Colleges and universities have natural lifelong relationships with their graduates, and most have

sufficient financial stability that they can patiently nurture relationships leading to ultimate gifts.

For many nonprofits in urgent need of increased support to balance current budgets, the distant

promise of an ultimate gift may seem unworthy of too much time and effort today. But as

Dunlop (1993) emphasizes, most organizations have at least a few close friends and donors with

whom they should be cultivating long-term relationships with the hope that they will eventually

produce the level of giving that can be transformative.

Planned Giving

A rapidly growing component of philanthropy includes gifts that are made in connection with

individuals’ financial or estate planning, known as planned gifts. Many major gifts today do

involve the use of sophisticated financial instruments, and planned giving has become a major

subfield within the fundraising profession. Experienced planned giving officers, or gift

planners as some are called, are highly sought after by all types of nonprofit organizations. The

aging of the U.S. population and the increasing wealth held by older people suggests that this

form of giving will grow in importance in coming decades.

As shown in Table 13.2, there are three types of planned gifts: outright planned gifts,

expectancies, and deferred gifts. Some outright gifts are planned gifts because they involve

complex assets, such as stocks or real estate, and may require the assistance of financial experts

to complete. An expectancy is a promise that a donor makes to provide a gift to the organization

at some future time, generally at death, through a bequest, life insurance, or a retirement plan.

These are also commonly known as testamentary gifts. Deferred gifts are gifts that the donor

makes now, but which are not available to the organization until some future time, generally

after the death of the donor or some other individual (Regenovich, 2011, pp. 146–150). Table

13.1 provides a brief summary of vehicles available for planned gifts; this chapter discusses only

a few of the most common.

Source: Developed by the author using various sources.

One of the simplest forms of a planned gift is a bequest, which is merely a statement in an

individual’s will or living trust dictating that on his or her death, some amount or portion of his

or her estate is to be given to a charitable organization. Other planned gifts, for example, those

using charitable remainder trusts and charitable gift annuities, are arrangements that provide for

the donor or another beneficiary to receive lifetime income, with the charitable organization not

gaining full use of the donated assets until after the death of the donor or the last income

recipient. Such gifts provide a tax deduction for some portion of the gift, but not for the full

amount, since the donor has a retained life income interest attributable to the noncharitable

portion of the payment. In addition to qualifying for income tax deductions, donors may avoid or

defer capital gains taxes on appreciated assets used to make a planned gift and, since the donated

assets are removed from the donor’s estate, there may be an estate tax saving, as well. As in our

earlier example, these tax benefits reduce the out-of-pocket cost of the gift, which can make the

rate of income received by the donor an attractive feature.

Other planned giving vehicles include lead trusts and life estates. A donor may place an asset in

a lead trust for a period of years, with the income being paid to the nonprofit organization. At the

termination of the trust, the asset is returned to the donor or the donor’s heirs. A donor who gives

his or her personal residence to a nonprofit organization may retain the right to continue living in

the property for the balance of his or her life, an arrangement that is known as a life estate.

Donor advised funds, maintained by community foundations and other managers of charitable

funds, permit individuals to make a gift and earn a tax deduction currently, while reserving the

right to make future recommendations on how the funds are to be distributed. It is important to

recognize, however, that the donor does not have the right to direct gifts and can only make

recommendations to the trustee of the fund.

The future of planned giving could be affected by changes in the federal estate tax. Assets that a

donor gives during life or at death are removed from the individual’s estate, and thus, there is a

tax saving, similar to the saving produced by the income tax deduction for gifts, as discussed

above. If tax rates change, the value of that tax deduction changes and affects the amount that an

individual may be able or motivated to give. In 2015, estates valued at $5,430,000 or more

(double that for a couple) are subject to a federal estate tax on amounts above those levels.

However, the estate tax is an ongoing topic of debate, so the exemption amount or tax rates may

change in the years ahead. Similarly, the law regarding donor advised funds is a topic of

recurring debates and changes could affect the attractiveness of these vehicles to some donors

(Daniels, 2015). Students are encouraged to check with websites such as Independent Sector

(www.independentsector.org) or AFP (www.afpnet.org) for up-to-date information on the law.

Planned giving is a complex topic, and a full discussion is beyond the scope of this text, but

additional reading is recommended at the end of this chapter for those who wish to pursue a

more indepth understanding. The Partnership for Philanthropic Planning (www.pppnet.org) is a

professional organization of gift planners that offers important education and materials. There

are also websites that provide cases, resources, and tools for planned giving professionals, and

some are listed at the conclusion of this chapter.

Campaigns

Fundraising campaigns have been a part of the nonprofit landscape since the early years of the

20th century, when the campaign method was developed by fundraisers for the YMCA. The

model was later adopted by higher education institutions and subsequently by most other

nonprofit organizations. Historically, campaigns were known as capital campaigns and were

usually undertaken specifically to construct new physical facilities. Over the past three decades,

however, many campaigns have become comprehensive, including within their goals not only

funds for facilities but also endowment, operating funds, and support for programs. At any given

time in most communities today, there will be highly publicized campaigns underway by

multiple organizations, seeking funds for all these purposes. The dollar goals are often

substantial and to be achieved typically in five to eight years.

What distinguishes a campaign from just ordinary fundraising? First, a campaign is intensive,

ranking among the highest priorities of the organization and usually commanding a significant

amount of time and energy from the CEO, board members, fundraising staff, and others. This

intensity is created by two essential characteristics of a campaign—an announced dollar goal and

a deadline. A campaign has defined objectives, that is, specific purposes for which the funds are

being raised that are spelled out in campaign literature. The solicitation of gifts to a campaign

follows the principle of sequential fundraising, in which prospects are solicited in a planned

sequence beginning with those closest to the organization and the most promising prospects,

proceeding later to those who are less related or who are deemed to have less financial potential.

This process helps raise the sights of prospective donors by offering the example of those who

have already made impressive financial commitments. Finally, solicitations in a campaign

request a specific amount that has been deemed realistic for the particular donor. Donors are

rated according to their capacity to give and are solicited, in the appropriate order, for a gift at

that level. Without meeting these essential conditions, a fundraising effort is not really a

campaign. Thus, fundraising that aims to raise “as much as possible” or “as soon as possible” is,

by definition, not a campaign, because it does not proceed against a specific goal that it intends

to reach within a defined period of time. Solicitations that ask people to give as much as they can

represent a “collection,” but not a campaign, which seeks specific gifts from donors deemed

capable of making them (Worth, 2010).

Campaigns proceed in phases, as depicted in Figure 13.3. They are rooted in the organization’s

strategic planning, which defines goals and directions and financial needs. Planning for a

campaign itself is a process that may encompass months or years and includes the identification

of prospects, enlistment of volunteer leaders, and the hiring of fundraising staff. In order to

maximize the solicitation of significant early gifts, and their impact on the sights of donors in

later phases, a campaign is not announced to the public until a significant portion of its total goal

has been raised as part of a nucleus fund during what is known as the campaign’s quiet

period or quiet phase (sometimes called the silent phase). A formal kickoff of the campaign

usually includes announcement of the overall goal, celebration of the amount already raised

toward it as part of the nucleus fund, and recognition of nucleus fund donors. The kickoff is

intended to establish momentum, generate good feelings, demonstrate that the campaign is likely

to be successful, and inspire prospects who have not yet given to set their sights in relationship to

what the nucleus fund donors already have done.

FIGURE 13.3 Phases of the Campaign

Following the kickoff, the campaign is in its public phase. Efforts to bring visibility to the

campaign and its goals often become a significant component of the organization’s

communication efforts for the duration of the campaign. Planning for today’s campaigns

includes marketing and communication goals that are nearly as important to the organization as

the financial goals addressed by the campaign. They have become tools for positioning

organizations and, indeed, some campaign goals, especially in higher education, are often set at

least in part to make a statement about the institution’s relative rank and prestige, rather than

reflecting exclusively its considered financial needs.

An important tool in planning and managing a campaign is the gift chart, also known as the gift

standards chart(although the format might more appropriately be called a table.). An example,

based on a campaign goal of $250 million, is provided in Table 13.2. The chart reflects the

proportional giving necessary to achieve the campaign’s overall goal, starting with a lead gift

that is at least 10 percent of the goal, and then doubling the number of gifts needed at each

successively lower dollar level. The ratios used to construct the table have been developed

through experience in many campaigns over the past century and often reflect the pattern of

giving to a campaign when studied retrospectively. In recent years, however, some campaigns

have diverged from these historic patterns, with an increasingly large percentage of the total

coming from a decreasing number of very large gifts at the top of the chart—in other words,

from fewer major donors but larger gifts. That change reflected the economic booms of the late

1990s and mid-2000s as well as the increasing concentration of wealth in the United States and

other economic and demographic changes. The gift-range chart is useful in projecting how many

gifts will be needed to obtain a specified goal. Using the industry standard, that about four

prospects are required to produce every closed gift, it also provides a way to assess if the

organization has developed a donor constituency sufficient to support a proposed campaign goal.

It may also be useful in demonstrating to the early donors, often including board members, why

their gifts need to be exceptional, in order to meet the requirements at the upper ranges of the

chart and set the standards for others who will ultimately be asked to support the campaign.

Managing Fundraising Programs

Fundraising programs today are sophisticated undertakings, even at modestly sized nonprofit

organizations. In larger institutions, the staff of a development office may include dozens or even

hundreds of professionals in various specialties, including annual giving, corporate and

foundation relations, major gifts, and advancement services.

Advancement Services

Advancement services has emerged as an important subspecialty in the field, encompassing all

the backoffice operations such as gift recording and acknowledgment, prospect research, and

information systems management.1 Most nonprofit organizations use one of the commercially

available software packages that are comprehensive in their capabilities to maintain donor

information and gift records as well as track cultivation and solicitation activity and evaluate the

productivity and effectiveness of specific initiatives or fundraising staff.

As mentioned earlier, the growing availability of information on the Web has revolutionized the

field of prospect research. Databases of corporate and foundation giving programs enable

researchers to identify promising prospects quickly. The giving capacity of individual prospects

can be evaluated using a number of sophisticated electronic screening tools that will also identify

known relationships of prospects, for example, to members of the organization’s board.

However, the costs of such screening can be high for many small nonprofits, and there is still

much insight and information to be obtained through the more traditional method of having

prospects screened by peers. Individuals in the same business community, the same church, or in

the same graduating class may have a good sense of the financial capability and interests of their

peers and are often willing to rate their capacity in a setting that provides confidentiality.

Prospect Management

In sophisticated fundraising programs, relationships with donors and prospects are not developed

casually or randomly. Contacts are planned, scheduled, and tracked, and a member of the

development office staff is assigned as the prospect manager with responsibility for moving the

relationship forward. A strategy is developed for each major prospect, and contact

reports entered into the fundraising information system document every interaction and make it

possible for a fundraising manager to monitor the movement of prospects through the

fundraising cycle.

In large organizations, especially those with multiple units and decentralized fundraising,

policies requiring prior clearance of contacts with donors are essential. For example, this

situation is common in universities, where alumni may hold degrees from more than one school

and be viewed as prospects for giving to all of them. Multiple contacts by different units of the

organization may be irritating to donors and create the impression that the organization is poorly

managed or inept. In addition, there is always the risk of a preemptive smaller gift that disrupts a

careful plan that might have led to a more significant commitment.

Fundraising Efficiency and Effectiveness

The costs of fundraising are a topic that receives considerable discussion and that has been the

focus of various studies. As discussed in Chapter 6, some charity watchdog organizations have

established guidelines suggesting that fundraising costs should not exceed about one third of the

total funds contributed. The Supreme Court has held that government may not set a maximum

level of fundraising expenditure because doing so would be an abridgement of free speech rights

under the U.S. Constitution, but the public availability of Form 990 and other financial

information has made organizations sensitive to the appearance of high costs in the eyes of their

donors as well as the watchdog raters.

Some people say that setting limits on fundraising costs is unfair to organizations that are new or

controversial and, therefore, must expend more effort and more money in order to meet their

needs for gift support. In addition, it can sometimes be difficult to determine the true total costs

of fundraising by an organization. Some portion of the time and effort of a CEO may be devoted

to cultivating and soliciting gifts, but it is not always easy to identify that portion exactly, since

some activities may involve donors but may also have other purposes. For example, is the CEO’s

time spent with a board member who is also a donor to be considered fundraising activity, or is it

related to broader governance of the organization? Printed materials and mail solicitations may

include a solicitation as well as other information, which may be considered educational or

informative and thus an activity related to the organization’s mission rather than fundraising.

Accounting rules describe how the costs of such mailings and materials are to be allocated

between fundraising and mission related purposes, but some nonprofits may not be clear about

exactly how such costs should be apportioned.

Historically, the ratio most commonly used to evaluate the efficiency of fundraising was cost-

per-dollar-raised, that is, the amount of expenditure on fundraising divided by the total gifts

received—it is a cost-benefit ratio stated in dollar terms. For example, if an organization spends

$50,000 on fundraising and receives $500,000 in gifts as a result, its cost would be 10-cents-per-

dollar-raised. If the same expenditure brought in $1,000,000, its relative cost would be half as

much, just five-cents-per-dollar-raised. However, most now argue, this ratio is an inappropriate

measure for at least two reasons. First, it is a negative way of looking at fundraising—as an

expense rather than as an investment. For example, if an organization spends as much as 50 cents

to raise a dollar, which would be considered a relatively high cost, that would still represent a

100 percent return on its original investment. There are few investments in which it is possible to

double one’s money, and a 100 percent return would be considered very good performance by a

manager of an investment portfolio.

The second related objection is that cost-per-dollar-raised measures fundraising efficiency, but it

says nothing about fundraising effectiveness. For example, if one organization spends $50,000 to

raise $500,000, its cost is just 10-cents-per-dollar and its net revenue is $450,000. Suppose

another organization spends twice as much, $100,000, and its efforts result in gifts totaling

$600,000. Its relative cost is much higher than the first organization—almost 17-cents-per-dollar.

Its fundraising is less efficient, but its net revenue of $500,000 is higher than that of the first

organization and its fundraising is thus more effective. For these reasons, most organizations

today consider the return-on-investment in fundraising and look at what is spent in relation to

what is raised over a time frame of years.

Attention to the costs—and results—of fundraising is commanding more attention by nonprofit

managers as well as charity watchdogs and donors. Despite the argument that fundraising costs

and returns should be viewed on a long-term basis, it is also the reality that organizations

spending a high percentage of gift revenue on fundraising activities may be subject to criticism.

The negative impact of controversy may more than offset whatever financial gains their

fundraising plan anticipates.

Staff Performance and Accountability

An important question, especially in larger development offices with staff members who are

specialized in the area of major gift fundraising, is how to evaluate the performance of individual

fundraising professionals.

Perhaps the simplest measure would be the amount of money each staff member raises, but that

approach creates a number of issues. First, most major gifts do not result from the efforts of a

single individual. As we have discussed, a donor’s relationship with an organization may

develop over a long period of time, perhaps exceeding the tenure of any single member of the

staff. There are many key players in building such relationships, including perhaps the CEO and

volunteers, as well as members of the board. It is usually not easy to identify exactly who is

responsible for the receipt of a major gift; indeed, the individual who solicits the gift may have

played a relatively minor role.

A second problem with using dollars raised to evaluate the performance of a development staff

member is that it might create incentives that would lead to inappropriate behavior. That is not to

suggest that the fundraiser would necessarily engage in unethical or immoral behavior with

regard to a donor, but it is possible that a development staff member who knows he or she will be

evaluated on the basis of gifts secured will, even if unconsciously, short-circuit the process in a

way that is disadvantageous to the organization. For example, a fundraiser with such an incentive

might direct his or her efforts toward soliciting gifts from prospects who are known to be ready

to give, rather than cultivation of prospects who may not be ready yet but whose long-term

capacity to give is much higher. The staff person might neglect stewardship of past donors who

are still making payments on long-term pledges and who have a high likelihood of giving again,

while pursuing new donors to hit some dollar target on which his or her own performance will be

evaluated. And, of course, there could be instances in which a development staff member under

pressure to maximize gift revenue misleads a donor or exaggerates the benefits of a gift under a

reward system that values only gifts completed. For these reasons, some organizations evaluate

the performance of fundraising staff primarily on the activity they undertake, for example, the

number of visits made and the number of proposals submitted, rather than the dollars they raise

in the short run. Others use formulas that combine credit for such activity with the value of gifts

closed.

Again, while it is an issue mostly in larger fundraising operations, the best method for evaluating

and rewarding professional staff is a topic of current discussion and debate. Some development

staff are paid incentive-based compensation, including bonuses, which may reward activity (e.g.,

the number of donor visits completed) exceeding some predefined objectives. Such programs

need to be carefully designed to ensure that the fundraising staff is not being paid a

commission—that is, a percentage of the gifts they raise. Basing staff compensation on a

percentage of gifts raised is unethical behavior, explicitly prohibited by the ethical codes of the

Association of Fundraising Professionals and other professional organizations in the field. The

practice would not only raise concerns about the possibility of incentivizing misbehavior by

fundraisers, but it also goes to the heart of the philanthropic relationships and the assumption of

trust and mutual commitment to a cause or organization that donors assume to be present when

they discuss a gift with the organization’s representative.

Ethics and Professional Standards

The question of compensation for fundraising staff is just one area of potential ethical challenge

always present in the complex relationships among organizations, their donors, and the

individuals who solicit funds on the organization’s behalf. Most ethical questions that arise in

fundraising can be placed into one of four principal categories.

First, some issues involve the behavior of the staff person who is interacting with the donor.

They would include making misleading or dishonest representations, for example, exaggerating

the organization’s effectiveness, lying about how the gift will be used, or making unreasonable

or unrealistic promises to the donor about recognition or the financial benefits of giving. It is also

unethical for a nonprofit staff member who is managing a relationship with a donor to attempt to

use that relationship for his or her personal benefit or gain or to engage in behavior toward the

donor that would be morally repugnant, for example, sexual harassment.

A second category of ethical issues that may confront nonprofit organizations relates to the donor

rather than the staff member. For example, what if the organization has reason to believe that the

donated funds were illegally obtained? Should a nonprofit accept gifts from a company that

makes products it knows to be harmful? What about the question of accepting a gift from a donor

who has been convicted of a white-collar crime or who simply has an unsavory reputation that

might reflect badly on the organization, were the gift to receive publicity? There have been a

number of examples of such dilemmas posed by gifts from businesspeople who were later

involved in corporate corruption scandals, after a building or program had been named to

recognize a past gift. Should the organization remove the name? By whose judgment should such

decisions be made, and what are the limits of the organization’s responsibility—and right—to

investigate and judge the character of donors who may offer them support?

A third, and sometimes less obvious ethical, question is presented by restricted gifts: Under what

circumstances should an organization refuse to accept a gift that may require it to undertake new

programs and perhaps incur additional expenses that it had not anticipated? What if the new

program is not entirely consistent with the organization’s mission or would require a redefinition

of its mission? For example, if an organization concerned with young children were offered a gift

to begin a new program to help prevent high school students from dropping out, it would need to

consider whether expanding its mission in that way would jeopardize its focus on its primary

mission, what additional costs the new efforts might create in the future, and whether such

expansion might endanger the organization’s overall health and other sources of support. It might

not be an easy decision to make if the offered gift were very substantial and, especially, if the

donor were an important local businessperson or even a member of the organization’s board. The

risk to the relationship in turning down the gift would need to be weighed against the potential

risk to the organization if it were accepted with the conditions that accompany it.

Another subcategory of questions arises with gifts that come with conditions that might give the

donor inappropriate control. For example, most colleges will accept scholarship gifts that require

recipients to be enrolled in certain academic programs; that raises few problems unless, for

example, the college thinks it unlikely will be able to recruit many students meeting the

conditions. But there are limits to how much influence a donor can be allowed to have in the

process of selecting specific scholarship recipients. Allowing the donor to select the recipient of

the scholarships would not only present an ethical concern but, indeed, it could also invalidate

the tax deductibility of the donor’s gift, making it legally a gift to the scholarship

recipient individually rather than to the college, university, or school.

A fourth category of ethical concern that has increased with the growing sophistication of

prospect research involves maintaining appropriate safeguards to protect the privacy of donors

and prospects. The development offices of many organizations may possess information obtained

from public sources about individuals’ financial wealth and income, real estate holdings, and

even family situations. It is legal to obtain such data. But some would argue, when it is

assembled to create a donor profile, its wide distribution may be an inappropriate invasion of

privacy. In addition, development office files may include information gained from reports

written by staff members who have visited the donor over the years or heard secondhand from

others who know the donor. Maintaining such information in the files of the fundraising office

runs the risk that the donor, and the organization, could be embarrassed if it were inappropriately

or inadvertently disclosed to another person.

The Association of Fundraising Professionals “Code of Ethical Principles” and “Principles of

Professional Practice” cover many of the major issues that nonprofits and members of their staff

may encounter in raising philanthropic funds. But possible situations are so varied that no code

can substitute for continuing ethical awareness and the application of good judgment by

nonprofit managers who value the interests of their organizations and their missions above all

else (see Box 13.6).

BOX 13.6 AFP CODE OF ETHICAL PRINCIPLES AND STANDARDS

(Ethical principles adopted 1964; amended September 2007)

The Association of Fundraising Professionals (AFP) … exists to foster the development and growth of fundraising

professionals and the profession, to promote high ethical behavior in the fundraising profession and to preserve and

enhance philanthropy and volunteerism. Members of AFP are motivated by an inner drive to improve the quality of

life through the causes they serve. They serve the ideal of philanthropy, are committed to the preservation and

enhancement of volunteerism; and hold stewardship of these concepts as the overriding direction of their

professional life. They recognize their responsibility to ensure that needed resources are vigorously and ethically

sought and that the intent of the donor is honestly fulfilled. To these ends, AFP members, both individual and

business, embrace certain values that they strive to uphold in performing their responsibilities for generating

philanthropic support. AFP business members strive to promote and protect the work and mission of their client

organizations.

AFP members [both individual and business] aspire to:

• practice their profession with integrity, honesty, truthfulness, and adherence to the absolute obligation to safeguard

the public trust;

• act according to the highest goals and visions of their organizations, professions, clients and consciences;

• put philanthropic mission above personal gain;

• inspire others through their own sense of dedication and high purpose;

• improve their professional knowledge and skills, so that their performance will better serve others;

• demonstrate concern for the interests and well-being of individuals affected by their actions;

• value the privacy, freedom of choice and interests of all those affected by their actions;

• foster cultural diversity and pluralistic values and treat all people with dignity and respect;

• affirm, through personal giving, a commitment to philanthropy and its role in society;

• adhere to the spirit as well as the letter of all applicable laws and regulations;

• advocate within their organizations adherence to all applicable laws and regulations;

• avoid even the appearance of any criminal offense or professional misconduct;

• bring credit to the fundraising profession by their public demeanor;

• encourage colleagues to embrace and practice these ethical principles and standards;

• be aware of the codes of ethics promulgated by other professional organizations that serve philanthropy.

Ethical Standards

Furthermore, while striving to act according to the above values, AFP members, both individual and business, agree

to abide (and to ensure, to the best of their ability, that all members of their staff abide) by the AFP standards.

Violation of the standards may subject the member to disciplinary sanctions, including expulsion, as provided in the

AFP Ethics Enforcement Procedures.

Member Obligations

1. Members shall not engage in activities that harm the members’ organizations, clients, or profession.

2. Members shall not engage in activities that conflict with their fiduciary, ethical, and legal obligations to their

organizations, clients or profession.

3. Members shall effectively disclose all potential and actual conflicts of interest; such disclosure does not preclude

or imply ethical impropriety.

4. Members shall not exploit any relationship with a donor, prospect, volunteer, client, or employee for the benefit of

the members or the members’ organizations.

5. Members shall comply with all applicable local, state, provincial, and federal civil and criminal laws.

6. Members recognize their individual boundaries of competence and are forthcoming and truthful about their

professional experience and qualifications and will represent their achievements accurately and without

exaggeration.

7. Members shall present and supply products and/or services honestly and without misrepresentation and will

clearly identify the details of those products, such as availability of the products and/or services and other factors

that may affect the suitability of the products and/or services for donors, clients, or nonprofit organizations.

8. Members shall establish the nature and purpose of any contractual relationship at the outset and will be responsive

and available to organizations and their employing organizations before, during, and after any sale of materials

and/or services. Members will comply with all fair and reasonable obligations created by the contract.

9. Members shall refrain from knowingly infringing [on] the intellectual property rights of other parties at all times.

Members shall address and rectify any inadvertent infringement that may occur.

10. Members shall protect the confidentiality of all privileged information relating to the provider/client

relationships.

11. Members shall refrain from any activity designed to disparage competitors untruthfully.

Solicitation and Use of Philanthropic Funds

12. Members shall take care to ensure that all solicitation and communication materials are accurate and correctly

reflect their organizations’ mission and use of solicited funds.

13. Members shall take care to ensure that donors receive informed, accurate, and ethical advice about the value and

tax implications of contributions.

14. Members shall take care to ensure that contributions are used in accordance with donors’ intentions.

15. Members shall take care to ensure proper stewardship of all revenue sources, including timely reports on the use

and management of such funds.

16. Members shall obtain explicit consent by donors before altering the conditions of financial transactions.

Presentation of Information

17. Members shall not disclose privileged or confidential information to unauthorized parties.

18. Members shall adhere to the principle that all donor and prospect information created by, or on behalf of, an

organization or a client is the property of that organization or client and shall not be transferred or utilized except on

behalf of that organization or client.

19. Members shall give donors and clients the opportunity to have their names removed from lists that are sold to,

rented to, or exchanged with other organizations.

20. Members shall, when stating fundraising results, use accurate and consistent accounting methods that conform to

the appropriate guidelines adopted by the American Institute of Certified Public Accountants (AICPA)* for the type

of organization involved. (*In countries outside of the United States, comparable authority should be utilized.)

Compensation and Contracts

21. Members shall not accept compensation or enter into a contract that is based on a percentage of contributions;

nor shall members accept finder’s fees or contingent fees. Business members must refrain from receiving

compensation from third parties derived from products or services for a client without disclosing that third-party

compensation to the client (for example, volume rebates from vendors to business members).

22. Members may accept performance-based compensation, such as bonuses, provided such bonuses are in accord

with prevailing practices within the members’ own organizations and are not based on a percentage of contributions.

23. Members shall neither offer nor accept payments or special considerations for the purpose of influencing the

selection of products or services.

24. Members shall not pay finder’s fees, commissions, or percentage compensation based on contributions, and shall

take care to discourage their organizations from making such payments.

25. Any member receiving funds on behalf of a donor or client must meet the legal requirements for the

disbursement of those funds. Any interest or income earned on the funds should be fully disclosed.

Source: Used with permission of the Association of Fundraising Professionals.

Chapter Summary

Gifts are a significant component of revenue for many nonprofit organizations, although patterns

vary widely among subsectors. Gifts comprise a small percentage of revenue for health care

institutions, which derive most of their revenue from fees for service. At the other end of the

spectrum, gifts are almost the only source of income for religious congregations and many

human services nonprofits. Organized fundraising is rapidly becoming more common across the

world, but it is still most highly developed in the United States. The term fundraising is often

used synonymously with the term development or advancement, but the latter two terms are

properly understood to encompass a more comprehensive approach to institution building that

includes other external relations functions.

It is important to distinguish between charity, that is, giving to address current human needs, and

philanthropy, which seeks to establish or strengthen institutions that address society’s needs on a

long-term basis. Charity is sometimes impulsive and is emotionally driven; philanthropy is often

more thoughtful and deliberate.

The motivation to give is quite different among corporations, foundations, and individual donors.

Corporate philanthropy generally seeks to advance the corporation’s business interests while also

accomplishing some social benefit. Corporate support of nonprofits encompasses philanthropy

and also various partnerships, which will be discussed in the next chapter. Foundations exist to

make gifts and are required by law to do so. There are various types of foundations, some of

which may be prospects for support of nonprofit organizations and others that operate their own

programs and generally do not provide grants to others.

Most individual donors are likely to be less organized and rational in their giving than are

corporations or foundations. A considerable body of research exists on the motivations of

individual donors. Findings generally suggest that individuals are motivated by altruism, a desire

to pay back for benefits that they have received, desires for social advancement and recognition,

as well as other reasons. The influence of tax incentives on giving by individuals is a subject of

debate among economists and other experts.

Fundraising is a process that begins with the organization identifying its own priorities and

developing a case for support and progresses to identifying prospects who have linkage, interest,

and the ability to give; cultivation of relationships with those prospects; solicitation of the gift;

acknowledgment and recognition of the gift and donor; and stewardship to continue the

relationship and prepare for continued support from past donors. Development of the case, or the

rationale for why the organization deserves support, is a critical step. A strong case is larger than

the organization—it starts with the social needs that the organization’s programs address and

then becomes more specific in describing how needed funds will enhance the organization’s

ability to address those broader needs.

The solicitation of gifts may use various media, including mail, phone, personal meeting, and—

increasingly—electronic communication, such as the Internet, e-mail, texting, and social media.

Each of these approaches offers advantages and disadvantages. Social media are generally of

more value to nonprofit organizations as a way to build and maintain relationships than as a

fundraising method, but their importance for fundraising is likely to increase.

The fundraising pyramid depicts how many donors evolve in their giving relationship with an

organization, beginning as regular annual donors and possibly advancing to become major

donors and eventually donors of ultimate gifts. Organizations often build their fundraising

programs in accordance with the pyramid, beginning with solicitations for annual gifts and then

developing major gift and planned gift programs as their constituency is ready.

Planned giving is a growing area of fundraising and philanthropy. There are three basic types of

planned gifts—outright planned gifts, expectancies, and deferred gifts. Each offers various

advantages to the donor, and the vehicle selected will reflect the individual’s financial and estate

considerations. Campaigns are intensive fundraising efforts that seek to raise a given amount by

a specified deadline for specific purposes or campaign objectives. Campaigns proceed in phases,

and it is important that the model be followed to ensure success in achieving the goal. The gift-

range chart depicts the pattern of giving necessary to achieve a dollar goal and is a useful tool in

planning and managing a campaign.

Advancement services, encompassing the back-office operations of fundraising, has become an

important subspecialty of the field. This area includes prospect research, gift accounting, and the

maintenance of fundraising information systems and records.

Questions about the efficiency and effectiveness of fundraising are often discussed and debated.

Evaluating the ratio of fundraising cost to dollars raised may be unfair to younger, smaller

organizations and does not reveal the effectiveness of a fundraising program in maximizing net

revenue. The return on investment in fundraising is a more appropriate measure of effectiveness,

but some still emphasize the ratio of costs to revenue and prefer to see fundraising expenditures

at a minimum. Fundraising costs that are high may attract the attention of the media, donors, and

government officials and result in negative publicity. Discussion also surrounds the

compensation of fundraising staff, some of whom receive financial incentives for performance.

Compensation based on a percentage of gifts secured is considered unethical in the field.

Fundraising often raises ethical issues, including, among others, those related to the behavior of

fundraisers themselves, the reputation of the donor or the source of that individual’s wealth, the

impact of restricted gifts on the mission of the organization, and concerns about donor privacy

and the use of information resulting from prospect research. AFP and other organizations have

established ethics codes that are widely followed by practitioners.

Note

1. In an office that engages only in fundraising, this function might be called “development

services” or “development operations.” But in some organizations, the back office supports not

only fundraising but also marketing and communications programs—for example, by

maintaining mailing lists for newsletters and records for special events—and is thus known as

“advancement services,” reflecting the broader concept of institutional advancement, as

discussed earlier.

KEY TERMS AND CONCEPTS

 ability, linkage, interest

 advancement

 advancement services

 Association of Fundraising

 Professionals

 bequest

 campaign

 case for support

 case statement

 catalytic philanthropy

 charitable gift annuity

 charitable remainder trust

 charity

 contact reports

 cost-per-dollar-raised

 crowdfunding

 cultivation

 deferred gifts

 development

 donor advised fund

 enlightened self-interest

 expectancies

 external case statement

 family foundations

 fundraising

 fundraising pyramid

 gift chart/gift standards

 chart

 gifts-in-kind

 identification of prospects

 institutional advancement

 internal case statement

 kickoff

 lead trust

 life estate

 major gift

 nucleus fund

 outcome-oriented philanthropy

 out-of-pocket cost

 outright planned gifts

 Partnership for Philanthropic

 Planning

 philanthropy

 planned giving

 prospect

 prospect management

 prospect research

 quiet phase

 regular gifts

 return on investment

 soliciting

 special gifts

 stewardship

 strategic philanthropy

 testamentary gifts

 venture philanthropy

CASES 13.1a-g Fundraising Ethics

Case 13.1a

A generous gift is offered to your organization by a donor whose company was involved in the mortgage crisis of

the late 2000s. His gift would be recognized through naming of a major wing on the new building that the gift would

help to fund. Although he was not personally accused of legal wrongdoing, members of your governing board

express concern that identifying his name with the organization could harm its image and reputation. One board

member also raises the possibility that the donor might become involved in questionable business practices in the

future and suggests that you negotiate a gift agreement that specifically permits the organization to remove the

donor’s name from the facility should he ever be criminally indicted or otherwise become an embarrassment to the

organization. Do you accept the gift? How do you approach the donor about the proposed terms of the gift

agreement?

Case 13.1b

A donor wants to give an art collection to the art gallery at which you are employed. Her requirement is that the

gallery be set up just like her home and that she be able to use it for private events on request. Do you accept? What

are the ethical issues and what are some possible legal concerns?

Case 13.1c

In private conversation, a fundraiser is told that a prospect’s husband is terminally ill and the family has financial

problems, despite appearances. Do you record that in the database? A volunteer is about to solicit that prospect for a

major gift. Do you reveal this information to the volunteer?

Case 13.1d

A donor is considering a major gift to a center on competitiveness at your institution, a public policy “think tank.”

He is a corporate executive, and you know that he is a strong proponent of tariff protection for U.S. companies. A

leading proponent of free trade is about to be appointed as a senior fellow in your research center and you know this,

but it hasn’t been publicly announced. Do you tell the donor about the impending appointment or just stay quiet?

Case 13.1e

A donor you had cultivated on behalf of your nonprofit employer dies. In her will, she leaves you a watch you had

once admired as a personal gift. (Assume that your employer does not have a formal policy prohibiting this.) Do you

accept it? Why or why not? What if she leaves you $5,000? What if it’s $5 million? Does the amount make a

difference?

Case 13.1f

A donor pledges $1 million payable over five years to name a room in a new building. Another donor pledges $1

million to name the identical room next door but says he can only pay it over 10 years. Do you accept the second

gift and name the room? If so, are you obligated to tell the first donor about the difference in terms? If you think you

are not, then how would you handle questions from the first donor were he or she to learn of the arrangements

through a conversation with the second donor?

Case 13.1g

An older donor says that she wants to change her will, leaving everything to your organization. This will cut out her

daughter from whom she is estranged. The daughter, whom you know personally, is disabled. Do you encourage the

donor? Do you tell the daughter what is going on? Do you tell anyone else or just let this woman make her own

decision? What if you personally have doubts about the donor’s mental ability to make financial decisions?

Questions Related to Cases 13.1a-g

1. In the cases above, do the ethical issues involve behavior of a fundraiser, conditions placed on the gift or the

impact of the gift on the organization’s mission and resources, characteristics or personal reputation of the donor, or

concerns about privacy?

2. How would you handle the issues raised by each case?

QUESTIONS FOR DISCUSSION

1. Do you think that people give primarily for altruistic reasons or in order to receive

benefits for themselves, including warm feelings, recognition, and social approval? Might

the motivations differ among various types of gifts? Explain your answer and provide

examples.

2. Some people argue that donors should receive a more generous tax deduction for gifts to

organizations that serve the poor, such as homeless shelters, than they receive for gifts to

institutions that primarily serve the affluent, such as symphony orchestras. Do you agree

or disagree? Why?

3. If a friend asks you to sponsor his or her participation in a charity event, such as a run or

walk, do you usually give a positive response or not? Why? Would your response be

different if that friend asked you to do something similar the next month? Why?

SUGGESTIONS FOR FURTHER READING

Books

Arrillaga-Andreessen, L. (2012). Giving 2.0: Transform your giving and our world. San Francisco,

CA: Jossey-Bass.

Crutchfield, L. R., Kania, J. V., & Kramer, M. R. (2011). Do more than give: The six practices of

donors who change the world. San Francisco, CA: Jossey-Bass.

Davis, E. (2012). Fundraising and the next generation: Tools for engaging the next generation of

philanthropists. San Francisco, CA: Jossey-Bass.

Salamon, L. (2014). The new frontiers of philanthropy. New York, NY: Oxford University Press.

Worth, M. J. (2016). Fundraising: Principles and practice. Thousand Oaks, CA: Sage.

Articles

Bekkers, R., & Wiepking, P. (2011, October). A literature review of empirical studies of

philanthropy: Eight mechanisms that drive charitable giving. Nonprofit and Voluntary Sector

Quarterly, 40(5), 924–973.

Mesch, D. J., Brown, M. S., Moore, Z. I., & Hayat, A. D. (2011, November). Gender differences in

charitable giving. International Journal of Nonprofit and Voluntary Sector Marketing, 16, 342–

355.

Websites

Association for Healthcare Philanthropy: http://www.ahp.org/ 
Association of Fundraising Professionals: http://www.afpnet.org/ 
Lilly School of Philanthropy at Indiana University: http://www.philanthropy.iupui.edu 
Council for Advancement and Support of Education: http://www.case.org/ 
Foundation Center: http://foundationcenter.org/ 
Network for Good: http:www.networkforgood.org/ 
Partnership for Philanthropic Planning: http://www.pppnet.org/ 
Planned Giving Design Center: http://www.pgdc.com 
Companion Website 
Visit study.sagepub.com/worth4e for access to certain full-text SAGE journal articles and links 
to relevant video and multimedia content. 
 

14 Earned-Income Strategies 
Chapter Outline 
 Why Earned Income? 
 Partnerships With Business 
o Licensing 
o Sponsorships 
o Cause Marketing 
o Operational Relationships 
o Putting Partnerships Together 
 Nonprofit Business Ventures 
o Identifying Business Opportunities 
o Feasibility Analysis and Business Planning 
 Earned-Income Strategies: Issues and Decisions 
o Sorting Out the Issues 
o Evaluating Opportunities Against Mission 
o A Continuing Debate 
 Chapter Summary 
 
Many nonprofits have found that starting a business has forced the entire organization to become 
more focused and to sharpen its goals and management skills in all aspects of its work, thereby 
improving their balance sheets as well as their effectiveness in achieving their charitable 
missions. 
Photo: © iStockphoto.com/blackred 
Learning Objectives 
After reading this chapter, students should be able to: 
1. Define key terms and concepts related to nonprofit earned income. 
2. Explain questions that nonprofits should consider in evaluating earned income 
opportunities. 
3. Describe common types of partnerships between nonprofit organizations and business 
firms. 
4. Explain the process for identifying and developing nonprofit earned-income ventures. 
5. Evaluate the potential risks and rewards of earned-income strategies. 
6. Analyze cases, applying concepts from the chapter. 
This chapter discusses efforts by nonprofit organizations to increase and diversify their sources 
of revenue by engaging in various relationships with business corporations and by undertaking 
their own business ventures. Such activities are often discussed under the rubric of earned 

income, that is, income from payment for goods or services that the nonprofit has provided,

rather than contributed income (gifts). As mentioned earlier in this book, most revenue to the

nonprofit sector overall is earned income. This is especially true in education and health care, in

which payments made by students and patients, respectively, are by far the largest sources of

revenue. Many organizations also receive a significant portion of their revenue from government,

but most government funds are not gifts or grants. They are payment for services that the

nonprofit has provided and for which the government is paying on behalf of the clients served.

Obvious examples include government reimbursements paid to health care institutions under the

Medicare and Medicaid programs and scholarship funds paid to a college or university to be

applied to a student’s tuition bill. Both are earned income to the recipient organizations, since

they pay for services the organization provided to specific patients or students, respectively.

Government grants and contracts are discussed in Chapter 15.

Although it has received much attention in the past two decades, in the discussion related to the

sustainability of nonprofit organizations, earned income is not something new for many

nonprofits. Indeed, some of our discussion in Chapter 10 concerned the use of marketing

principles to increase earned income from nonprofits’ core mission-related activities, such as

providing education, health care, and artistic performances. In this chapter, we will consider two

specific sources of earned income: marketing partnerships with business corporations and

business ventures undertaken by nonprofits themselves.

As in so many areas related to nonprofit management, the vocabulary and definitions used to

describe various activities discussed in this chapter remain unsettled. For example, some people

use the term earned income to mean revenue from the sale of goods and services that are directly

related to the organization’s mission but use social enterprise to describe similar activities that

are not necessarily related to the mission. Others use the terms interchangeably, concluding that

“there is no useful distinction to be drawn between earned income activities and social

enterprise” (Lyons, Townsend, Sullivan, & Drago, 2010, p. 5). Another term that is widely used

is social entrepreneurship. For some, social entrepreneurship is virtually synonymous with social

enterprise; that is, it involves the use of business methods to generate revenue. But, others define

social entrepreneurship as leadership in social innovation, which may or may not involve earned

income (Dees & Anderson, 2006). For that reason, social entrepreneurship is discussed as a

separate topic in Chapter 16 of this book.

This chapter discusses commercial relationships between nonprofits and corporations and calls

them commercial partnerships or just partnerships, and nonprofit business ventures, which some

might call social enterprise. The latter may or may not be related to the mission, although most

are. The term earned-income strategies is used in this chapter to encompass all of these

activities. Figure 14.1 depicts the array of earned-income strategies that we will discuss. The

term commercialization is also used and generally means the trend toward increasing reliance of

nonprofit organizations on earned income of all types.

FIGURE 14.1 Earned-Income Strategies

Source: Adapted from Community Wealth Ventures (now Community Wealth Partners) (2001,

p. 7). Used with permission.

Source: Adapted from Community Wealth Ventures (now Community Wealth Partners) (2001,

p. 7). Used with permission.

Why Earned Income?

Why would a nonprofit want to pursue earned income? And why has interest in this area

increased? Primarily because there is increased competition for revenue, resulting from some of

the changes of the past two decades that were discussed in Chapter 3 of this book. Government

funding for social programs generally has declined or has shifted to a voucher approach that has

given potential clients choices about where to obtain services, introducing competition into the

nonprofit marketplace. Government increasingly has outsourced the provision of services based

on competitive contracts, forcing nonprofits to go head-to-head with each other as well as with

for-profit firms. Philanthropic giving has increased over the long term with the growth of the

general economy but has remained relatively constant as a percentage of gross domestic product,

while the number of nonprofits and their needs has continued to grow in real terms. In addition,

nonprofits have sought to diversify their sources of revenue, in order to protect themselves from

the vicissitudes of shifting political priorities that affect government support and the economic

cycles that determine charitable giving.

But it’s not all about money. Many nonprofits have found that pursuing earned income also helps

them advance their missions—for example, organizations that offer recovery and job-training

programs provide catering and food service or maintenance services, and retail stores that

employ their clients as well as generate income to support their core programs. Others have

found that operating a business has forced the entire organization to become more focused and to

sharpen its goals and management skills in all aspects of its work. Partnerships with corporations

offer not only the opportunity for new revenue but also the increased visibility that may come

from the company’s promotion of the partnership, benefiting the nonprofit’s efforts to raise

traditional charitable support. Such relationships also have given nonprofits access to new

volunteers and to the management skills and resources of corporate partners. In sum, many

nonprofits have found that pursuing earned-income strategies can improve their balance sheets as

well as their effectiveness in achieving their charitable missions.

Jane Wei-Skillern, James Austin, Herman Leonard, and Howard Stevenson (2007) offer a way to

think about earned income in terms of how important it is to the organization and how closely it

is related to the mission. As depicted in Figure 14.2, if earned income is not closely related to the

mission and generates a small portion of total revenue (the bottom, left quadrant), it may be

considered “disposable.” It provides a little extra, but it is not critical. For example, this might be

the case for T-shirts sold in the university bookstore. If an activity is related to the mission but

does not generate much money (the upper left quadrant), that could be called “supplemental”—it

helps, but it also is not critical to the organization. This might be the case, for example, if clients

are charged a modest, token fee to attend some type of training seminar. In the bottom right

quadrant of Figure 14.2 are earned income activities that are an important source of revenue to

the organization but that are not directly related to the mission; they might be called “sustaining,”

because the nonprofit is very dependent on them. For some organizations, some commercial

partnership with corporations might fall into this category. And, finally, some earned income is

closely related to the mission and provides a major portion of the nonprofit’s revenue could be

called “integral.” This would be the case for a number of commercialized nonprofits that derive

the largest portion of their revenue from the sales of goods and services that are central to their

missions, for example, in education, health care, and other fields.

FIGURE 14.2 Earned Income and the Organization

Source: Wei-Skillern, J., Austin, J. E., Leonard, H., & Stevenson, H. (2007). Entrepreneurship in

the social sector. Thousand Oaks, CA: Sage, 140–143.

Source: Wei-Skillern, J., Austin, J. E., Leonard, H., & Stevenson, H. (2007). Entrepreneurship in

the social sector. Thousand Oaks, CA: Sage, 140–143.

Of course, earned income activities may offer downside risks as well as potential benefits.

Earned income is not a panacea for the nonprofit sector, nor is it a realistic expectation for every

organization. Indeed, some critics view the commercialization of nonprofits with deep concern.

Some suggest that establishing for-profits offers a more promising approach to addressing social

problems than can be achieved with the nonprofit form. But this perspective also is controversial

(Starr, 2012). Some issues will be discussed more fully toward the end of this chapter.

Partnerships With Business

Let’s begin our discussion of earned-income strategies with the top half of Figure 14.1—the

various types of relationships nonprofits may establish with corporate partners. First, we need to

be clear what we are talking about when we refer to nonprofit–corporate partnerships. The

term partnership is sometimes used rather loosely. For example, nonprofit donor lists may

include the names of “corporate partners,” but they are really corporate donors,since the

company has not received much in return for its payment beyond its inclusion on the list. A true

partnership is not a one-directional transaction; rather, it is a relationship that advances the goals

of both parties, an arrangement in which both sides receive specific benefits related to their

goals.

If a corporation gives money to a nonprofit based on altruism or a general sense of corporate

responsibility without receiving any specific benefit beyond perhaps the modest recognition

given to all donors, that is an example of corporate philanthropy but not a partnership. The

revenue in this instance is not earned income; it is contributed income. The corporate

partnerships discussed in this chapter produce earned income because the nonprofit is not

receiving a gift, but rather is earning the revenue through its participation in the relationship.

Not all partnerships between nonprofit organizations and corporations represent earned-income

strategies. For example, the Environmental Defense Fund (EDF) works with corporate partners

to implement innovations that have a positive environmental impact but also bring benefits to the

corporation, such as reduced costs. EDF (2014) does not accept gifts or grants from its corporate

partners, in order to maintain its credibility and independence, although it does accept gifts from

some corporations with which it is not programmatically involved. However, the partnerships we

are discussing in this chapter are those that do provide a financial benefit to both the nonprofit

organization and the corporate partner and are undertaken at least in part for that purpose.

Chapter 13 discussed the history of corporate philanthropy, including the emergence of strategic

philanthropy in the 1980s. Strategic philanthropy is an approach that aligns the corporation’s

giving with its competitive strategy as a business. In strategic philanthropy, the effectiveness of

corporate giving is measured by its impact on achieving the company’s business goals,

ultimately the bottom line of profitability. But it is still philanthropy since the company does not

receive an immediate quid pro quo. One example of strategic philanthropy might be provided

by gifts-in-kind. A software company might give a nonprofit its product for free. That is surely of

benefit to the nonprofit and there may no immediate benefit to the company. But it may result in

people becoming accustomed to using the product, perhaps leading them to stick with it when

they consider purchasing software for their own business or personal use in the future, so the gift

serves a strategic purpose (Galaskiewicz & Colman, 2006, p. 190).

Corporate philanthropy remains an important force. Companies gave more than $17.88 billion in

2013, including cash and gifts-in-kind of company products (Giving USA, 2014). But

commercial partnerships are the area of growth in corporate support of nonprofit organizations

and causes today. The watershed event came in 1983, when American Express supported

renovation of the Statue of Liberty by offering to contribute a penny to the campaign each time a

consumer used his or her American Express credit card. Use of American Express cards

increased by 28 percent during the campaign. Other companies noticed and corporate–nonprofit

partnerships took off (Wall, 1984, pp. 1, 29). By 2008, Reynold Levy, a former president of the

AT&T Foundation, observed the shift and pronounced that “the age of pure corporate

philanthropy is drawing to a close” (Levy, 2008, p. 66). The discussion in this chapter

encompasses a few of the most common nonprofit–corporate relationships—licensing

agreements, sponsorships, cause-related marketing,and operational relationships. Let’s run

through brief descriptions of each and look at some examples.

Licensing

If students buy T-shirts or coffee mugs with the name and logo of their college on it, they

probably do not think that the college manufactured the garment, but they may not know by what

arrangement the school’s logo is displayed. It is likely to be an example of a licensing agreement

between the college and the manufacturer of the shirt or mug.

A licensing agreement is a contract that permits a for-profit company to use the nonprofit’s name

or logo on its products in return for a royalty payment to the nonprofit. The benefit to the

nonprofit is the revenue it gains from the royalty and the increased visibility of its name. For the

company, having the nonprofit’s logo on its products will presumably attract purchases from

individuals who are affiliated with the nonprofit or who prefer the product over others because of

the perceived benefit to the nonprofit cause. But there is also something more subtle at work. By

using the nonprofit’s name or logo on its product, the company gains some of the attributes of

the nonprofit’s brand; that is, the company may come to be seen as more “caring,” more “green,”

or more concerned about specific groups of people by virtue of its association with the positive

qualities that people attribute to its nonprofit partner. In effect, when it enters a licensing

agreement, a nonprofit leverages some of its brand equity into a stream of income in the form of

royalties from the corporation.

Most licensing agreements bring few risks. For example, there is probably little that can go

wrong by having a college’s logo on a sweatshirt. But some licensing is more controversial,

especially agreements that place nonprofit logos on products that relate to food, health, or the

environment. The concern is that the presence of the logo implies the nonprofit’s endorsement of

the product; that is, the appearance of the name implies that the nonprofit is certifying the

product’s benefits, which may or may not be the case. In the American Heart Association’s food

certification program, for example, the products have been screened and found to comply with

the association’s criteria for saturated fat and cholesterol (American Heart Association, 2015).

However, in other instances, the appearance of the logo means only that the company has

provided a royalty payment to the nonprofit. It does not ensure that the nonprofit has investigated

the product or guarantees its consistency with the organization’s values. This could be easy for

consumers to misunderstand. One well-known licensing fiasco occurred in 1997, when the

American Medical Association (AMA) licensed its name to be used on home medical products

manufactured by Sunbeam Corporation. The endorsement implied that the AMA had established

the effectiveness of the products, but it had not done so. There was public criticism and an outcry

by doctors, who are the association’s members. The AMA was forced to end the relationship

with Sunbeam, paying the company almost $10 million in a lawsuit settlement. Not surprisingly,

some AMA employees also lost their jobs (Sagawa & Segal, 2000).

Sponsorships

In a licensing agreement, a corporation pays for use of a nonprofit’s name or logo on its

products. In a sponsorship, the company pays for the use of its name or logo in connection with

the nonprofit’s products or events. We are all familiar with corporate sponsorships; they would

be hard to miss. They are represented by the corporate logos on the scoreboards in many

university stadiums and arenas, on the T-shirts worn by participants in events like the Race for

the Cure, and almost everywhere at the Olympic Games.

It is important to note that some authors (e.g., Galaskiewicz & Colman, 2006) define

sponsorships as a form of strategic philanthropy, rather than a commercial partnership. For one

thing, unlike licensing agreements and cause-related marketing (which we will discuss in a

following section) sponsorships do not tie the nonprofit’s revenues directly to the company’s

products. In addition, sponsorship is not the same as advertising. Advertising communicates

more information and describes the virtues of the company’s products—it is intended to increase

sales of those products. Sponsorship is limited to exposure of the company’s name or logo. It is

intended to enhance the company’s overall visibility and image. But in this chapter, as in much

other writing about the topic, sponsorships are included as a type of commercial relationship

rather than philanthropy because they do involve an exchange: the nonprofit receives a payment

in exchange for permitting the corporation to associate its name with the nonprofit’s cause, in a

specific format and location that is negotiated as a condition of the payment, and in a manner

than is more visible than just the company’s name on a donor list. It is, in effect, a method for the

nonprofit to leverage its brand or cause in order to create a stream of income.

Corporations sponsor events such as charity walks, runs, and rides, or athletic competitions.

Some also sponsor organizations, entitling them to visibility and recognition across a broad range

of programs, products, and communications. Others sponsor facilities, such as athletic arenas and

concert halls, which may be named for the corporation. The facility may be named in perpetuity

to recognize a corporate gift, but many are named only for the term of a sponsorship contract

under which the company makes annual payments to the organization or institution operating the

facility. Again, sponsorship does not include detailed descriptions of the company’s products,

and the payment to the nonprofit is tied to opportunities for visibility and exposure, not directly

to sales.

Like licensing of a nonprofit’s own name and logo, corporate sponsorships offer nonprofits the

benefits of added revenue and increased visibility through the company’s promotion of the

relationship. Since they do not imply as strongly the nonprofit’s endorsement of the company’s

products, the risk to the nonprofit’s reputation may be somewhat less. But there are still reasons

for caution. One consideration, of course, is the consistency of the corporation and its products

with the mission and values of the nonprofit organization. It would be unlikely for an athletic

event to accept sponsorship from a tobacco company or an organization serving children to be

visibly associated with a company that sells alcohol. But some cases are closer calls, and it is

wise to review sponsorship opportunities against a predetermined list of criteria reflecting the

judgment of the organization’s board.

Cause Marketing

Some writers use the term cause marketing (or cause-related marketing) broadly to encompass

virtually all relationships in which a nonprofit’s and a corporation’s identities are combined,

including licensing and sponsorships. This text uses the term in a more specific way to mean an

arrangement under which the company contributes either a fixed amount for each sale of a

product or a specified percentage of its sales of a product to the nonprofit, usually in connection

with a short-term promotion. Cause marketing is different from social marketing, which we

discussed in Chapter 10. The purpose of social marketing is to influence behavior in order to

bring a benefit to the individual or society. Social marketing has no direct impact on revenue of

the nonprofit, although it may create greater visibility for the cause and possibly bring additional

gifts to the organization promoting it. The purpose of cause marketing is to sell more of the

corporate partner’s products, with a financial benefit to the nonprofit. There may be, of course,

the additional benefit of visibility, which can increase awareness of the cause it advances, with

an indirect impact on social behavior.

Unlike sponsorships and licensing arrangements, the nonprofit’s revenue from a cause-marketing

relationship is transaction based; that is, it is directly related to the volume or amount of sales of

the company’s products. Let’s look at a few examples:

 Yoplait promised to give 10 cents to Susan G. Komen, Bright Pink, or Living Beyond

Breast Cancer (based on the customer’s choice) for every pink yogurt lid mailed in

between October 1, 2014, and March 31, 2015, up to a maximum of $350,000 in total

(friendsinthefight.yoplait.com/#enter-your-codes).

 Every September since 2008, over 9,000 restaurants, representing 373 brands, participate

in Dine Out for No Kid Hungry, a program of nonprofit Share Our Strength. As a part of

this overall effort, Denny’s, one of the nation’s largest restaurant chains, and the

America’s Egg Farmers donated one egg to local food banks for every “Build Your Own

Omelette” purchased at a Denny’s restaurant from September 9 to September 15, 2013

(Hessekiel, 2013).

 In 2010, Nestlé, a food company, encouraged consumers to participate in a drawing for a

$5,000 prize by entering a code found on specially marked bags of candy. Nestlé

promised to give 10 cents to Reading Is Fundamental, a literacy organization, for every

submission and $2 for every instant winner, with a minimum donation of $100,000

(www.rif.org/us/donate/supporters/nestle.htm).

Again, cause marketing ties the nonprofit’s income directly to the number or amount of total

sales made by the corporate partner and thus represents a true partnership in which the interests

of both parties are aligned. The corporation may find the relationship beneficial both as a

strategy for increasing sales and as a way to improve its image and attract a new customer base,

perhaps among the members of a specific market segment. In a number of studies, consumers

have indicated that they would be more inclined to buy products when they know that the sale

benefits a charitable organization. For example, a 2013 study conducted by Cone

Communications, a company that works with businesses on nonprofit partnerships, found that 93

percent of consumers have a more positive image of a company that supports a cause; 82 percent

reported that the extent to which a company supports a cause influences their decisions about

where to shop or what to buy (Cone Communications, n.d.). Of course, such studies may be

subject to positivity bias; in other words, people are inclined to give the “right” answer to

questions about what their hypothetical behavior might be, and that does not ensure that they will

actually behave in that manner.

For the nonprofit, the marketing relationship may generate not only additional revenue but also

increased visibility. Promotions of the relationship often feature the logos of both the nonprofit

and the corporate partner, and a comprehensive campaign may include advertising, in-store

displays, and exposure in other media.

Cause-marketing relationships are governed by a contract between the nonprofit and the

corporate partner. Among other matters, the contract usually spells out how much is to be paid

(e.g., a fixed amount per sale or a percentage); the length of time for which the promotion will be

in effect; the maximum sum (if any) that the corporate partner will give; and rights of approval

that each partner retains with regard to ad copy, use of its logo, and related concerns. One

important question is whether and how the terms of the contract will be clearly disclosed to

consumers. Promotions that include statements such as “a portion of your purchase will be given

to charity” are inadequate, since they do not disclose what portion, whether the promotion covers

only certain dates, or whether the total contribution by the company is capped at some maximum

amount, as many are. In sum, such a statement does not assure an individual consumer that his or

her own purchase will result in a payment to the nonprofit.

Standard 19 of the Better Business Bureau (BBB) Wise Giving Alliance (2003) Standards of

Excellence addresses these potential issues, requiring that nonprofit organizations clearly

disclose how the charity benefits from the sale of products or services and the terms and

conditions of its agreement with the corporate partner. It reads as follows:

19. Clearly disclose how the charity benefits from the sale of products or services (i.e., cause-

related marketing) that state or imply that a charity will benefit from a consumer sale or

transaction. Such promotions should disclose, at the point of solicitation:

a. the actual or anticipated portion of the purchase price that will benefit the charity (e.g., 5 cents

will be contributed to abc charity for every xyz company product sold),

b. the duration of the campaign (e.g., the month of October),

c. any maximum or guaranteed minimum contribution amount (e.g., up to a maximum of

$200,000). (n.p.)

Standard 19 applies to the conduct of the nonprofit organization. It requires that when a nonprofit

enters a cause-related marketing contract, the contract it negotiates with the corporation should

include the disclosure requirements as a provision binding on both parties. In addition, laws in 22

states (as of December 2014) require registration by commercial co-venturers, that is,

corporations that are engaged in cause marketing. Some require specific provisions in the

contract between the nonprofit and the corporation and registration with a state agency

(Copilevitz & Canter, 2014).

In addition to traditional cause-marketing relationships, recent years have brought a number of

variations, including the proud supporter method; the donation with label or coupon redemption;

the corporate donation with consumer action; the dual incentive method; consumer pledge

drives; the consumer-directed corporate donation; and the buy-one, give-one method. Given

limitations of space, this chapter does not provide a description of these variations; more details

are provided by Cone Communications (2010) and other sources.

Many nonprofit relationships with corporations are now comprehensive and integrated. They

may include sponsorship, cause marketing, corporate philanthropy, employee volunteering, and

additional interactions. Some are also long-term relationships that result in a close identification

of the corporate brand with the nonprofit organization or cause. Another trend has been the

development of products branded with a cause. For example, Product Red is a brand licensed by

the Global Fund to Fight AIDS, Tuberculosis, and Malaria to a variety of corporate partners,

including American Express, Apple, Dell, Starbucks, and others (see the

website www.joinred.com). Pink products, intended to raise awareness of breast cancer and

provide support for breast cancer research, also have become ubiquitous. Such programs have

attracted critics, who express concern about a lack of transparency regarding the use of funds

generated. Some fear that consumers will believe the problem has been sufficiently addressed

through their shopping habits and will divert their attention and charitable giving elsewhere

(Raymond, 2009).

Operational Relationships

The relationships we have been considering so far all involve the blending of nonprofit and

corporate identities in some manner. The nonprofit’s principal contribution to the partnership is

its name, recognition, and reputation, for which the corporation is willing to pay in order to

enhance its own visibility, image, and sales. Such relationships are largely an exchange of

intangibles. But some nonprofit–corporate relationships bring the nonprofit into the heart of the

company’s business operations by “acting as a supplier, improving training or recruitment

services, offering benefits for employees, or serving as a test site for new products” (Sagawa &

Segal, 2000, p. 23). For example, Pioneer Human Services in Seattle is a nonprofit that provides

rehabilitation and employment services for individuals who are ex-offenders or in recovery from

alcohol or drug addiction. Pioneer has a long-standing relationship with Boeing, under which it

manufactures parts for Boeing aircraft (Pioneer Human Services, 2015). Goodwill Industries

International, Inc., through its independent local chapters, provides training for individuals who

are disadvantaged or have disabilities. The nonprofit has contracts with businesses to provide

temporary workers in document management, assembly, mailing, custodial work, grounds

keeping, and other fields (www.goodwill.org).

As discussed in Chapter 8, such relationships are not collaborations and usually do not meet the

strict definition of a partnership, although that term is sometimes used to describe them.

Operational relationships between nonprofits and corporations are business relationships, but a

corporation may be motivated to undertake them in part by social responsibility as well as

business interests.

As in the Pioneer and Goodwill examples, a number of operational relationships involve

nonprofits that provide employment or training programs. The nonprofits provide services and

resources that corporations need for their business operations, but they also provide opportunities

for companies to achieve a social benefit with resources that are outside their philanthropic or

marketing budgets. By directing some portion of their payroll or purchasing dollars to a

nonprofit serving people with needs, companies gain a kind of double impact: They advance a

social purpose while also meeting their own core operational needs.

Joint ventures are another type of operational relationship between nonprofits and for-profit

companies. As the term suggests, they are new initiatives undertaken jointly by the two entities.

A joint venture may involve a specific activity or the creation of a new entity jointly owned by

the two partners. Joint ventures between nonprofit hospitals and for-profit health care companies

have been especially common, reflecting the high capital needs of such institutions. Entering a

joint venture with a for-profit company can provide a nonprofit access to capital that it might

find otherwise impossible to raise and access to management and technical skills that it does not

possess. But there are risks, including possible distraction from the nonprofit’s mission, potential

financial losses, damage to the nonprofit’s image and reputation through actions of the for-profit

partner or the joint venture, and a multitude of legal hurdles. The IRS requires that the joint

venture serve a charitable purpose and that the nonprofit be free to act exclusively to pursue its

own purposes without benefit to the for-profit co-venturers (Simon, Dale, & Chisolm, 2006). The

law regarding joint ventures is complex and beyond the scope of this text.

Putting Partnerships Together

Successful partnerships have a logic to them, and a nonprofit seeking a corporate sponsor needs

to think in terms of the company’s interests and goals. For example, it makes sense for The

Home Depot to help nonprofit KaBOOM! build playgrounds. It sells building materials, its

employees know something about construction, and it has stores in many locations and an

interest in maintaining good relationships with the communities from which it attracts both

employees and customers. Home Depot also supports the American Red Cross with disaster

relief, which also makes sense, since recovery from a disaster often includes repairing buildings.

These relationships are good fits. It sounds right for Denny’s to work with the No Kid Hungry

campaign, since it is in the business of providing food. It is logical that Yoplait would support

the fight against breast cancer, since many of its customers are women. These relationships make

sense; the nonprofits and causes that are supported are important to individuals who are part of

the company’s target market, and there is an obvious relationship between what the company

does, where it does it, and the work of the nonprofit partner. But it would not be logical, or even

appropriate, for a tobacco company or a brewer to partner with an organization serving children,

nor would it make obvious sense for a company that manufactures entertainment products to be a

partner with a nonprofit concerned with homelessness. For a nonprofit seeking a corporate

partner, it therefore is essential to identify potential partners who are a logical fit and to be

prepared with a rationale that makes the connection between the company’s interests and goals

and the mission and programs of the organization.

Successful partnerships are not automatic. Shirley Sagawa and Eli Segal (2000) identify five

obstacles that can get in the way. First, nonprofits and corporations often speak a “different

language” (p. 181). They use different jargon with nuances that may complicate communication

across sector lines. Second, they may have different cultures; for example, corporations may be

accustomed to top-down decision making, while nonprofits need to build consensus before

acting. Third, the different status of the two partners may be an issue; after all, the corporation

has the money the nonprofit needs, and it may expect greater deference than the nonprofit

anticipates providing (p. 180). Fourth, the two parties may hold different world views.

Nonprofits leaders may be skeptical about business motives, and business people may not hold

nonprofit management in high regard. Fifth and finally, the two organizations have different

bottom lines; the nonprofit is mission driven while the corporation, whatever the level of social

consciousness it may hold, exists to generate profit and wealth for its owners. To identify and

avoid such potential hazards, nonprofits are advised to enter partnerships with an understanding

of themselves and their own needs, to seek out potential corporate partners consistent with their

values, to engage in discussion and with due diligence to explore the possibility of a relationship,

and to test it with small steps before expanding it to a wider engagement (p. 181).

Partnerships have become attractive to corporations, some of whom eagerly seek relationships

with nonprofits that provide a good fit with their strategic goals. Some engage for-profit

marketing firms to identify organizations and negotiate the partnership agreement. This suggests

the need for careful judgment on the part of organizations that are approached, to ensure that

potential partnerships offer both the promise of financial reward and an appropriate fit with the

organization’s mission, values, and image. The website of Independent Sector provides a

compendium of various guidelines for nonprofits that includes standards by which to consider

nonprofit–corporate partnerships

(see www.independentsector.org/compendium_of_standards#mktng).

Nonprofit Business Ventures

Let’s now shift our attention to the bottom half of Figure 14.1 and consider some strategies and

tools available to nonprofit organizations that wish to explore the idea of starting their own

revenue-generating business ventures.

A 2009 study conducted by Community Wealth Ventures (now Community Wealth Partners),

the Social Enterprise Alliance, and Duke University’s Center for the Advancement of Social

Entrepreneurship found a steady increase in the number of businesses since 1974 (Community

Wealth Ventures, 2010). But a note of caution is appropriate. J. Gregory Dees (2004) warns, “It

would be a mistake to think that nonprofit business ventures are always beneficial” (p. 4). Sharon

Oster, Cynthia Massarsky, and Samantha Beinhacker (2004) agree that “earning income from

commercial ventures is often no easier than generating donations. The failure rate for small

businesses (for-profit as well as nonprofit) is extraordinarily high” (p. xviii).

As Figure 14.1 depicts, nonprofits operate businesses engaged in three principal activities:

services, manufacturing, and distribution or retail. Some are very familiar and have been around

for a long time. For example, many of us have shopped in retail stores operated by Goodwill or

the Salvation Army. Most museums and hospitals operate gift shops and restaurants. Colleges

and universities also have bookstores and restaurants, and some have created for-profit

subsidiaries engaged in research or online education. But the range and variety of nonprofit

businesses across the country is reflected in many examples of creative and unusual enterprises

as well. Some examples will help us get the picture.

 DC Central Kitchen prepares meals for shelters and other institutions serving the

homeless in Washington, DC. It employs homeless men and women in its kitchen and

offers training programs in the culinary arts to prepare them for careers in the food

service industry. Fresh Start Catering was launched in 1996 as an outgrowth of the

training programs. It is a full-service catering business that serves clients in the public

and for-profit sector as well as nonprofits. Proceeds from Fresh Start provide support for

the Kitchen’s charitable programs while also providing additional employment skills to

DC Central Kitchen’s clients (www.dccentralkitchen.org/freshstart/).

 Triangle Residential Options for Substance Abusers (TROSA), located in North Carolina,

helps recovering drug and alcohol abusers change their addictive behaviors. Residents

receive food, clothing, and therapy for free for two years but are required to work in one

of TROSA’s seven businesses, engaged in moving, brick masonry, catering, commercial

and residential painting, lawn maintenance, picture framing, or retail sales

(www.trosainc.org).

 Mobile School is a Belgian organization that develops mobile street carts that provide

educational materials and games to street children in 21 countries. It also trains street

works to provide educational activities to the children (www.mobileschool.org/en/about-

us). Since street children are unable to pay for the services, Mobile School’s founder,

Arnoud Raskin, started a consulting firm, Streetwize. Board members of Mobile School

are shareholders of Streetwize, which produces revenue to sustain Mobile School’s

programs (Battilana, Lee, Walker, & Dorsey, 2012).

 First Book, headquartered in Washington, DC, is a nonprofit that promotes children’s

literacy by giving children from low-income families the opportunity to read and own

their first new books. First Book Marketplace, its business venture, sells new, high-

quality children’s books at low cost to organizations serving disadvantaged children. It

acquires large quantities of books at deep discounts from its publishing partners and sells

them to organizations at prices lower than they could obtain on their own. First Book

Marketplace makes a small profit, which it uses to support First Book’s core literacy

programs (www.firstbook.org/first-book-story/innovation-in-publishing/marketplace).

 The Magnolia School in New Orleans provides art courses for individuals with

intellectual and developmental disabilities and sells their work at art shows and a retail

store (Community Wealth Ventures, 2010).

Identifying Business Opportunities

How does a nonprofit organization that wishes to establish a business enterprise get started? It

will not surprise students who have read previous chapters on strategic planning and marketing

that the first steps involve looking both outward to the marketplace and inward to the

organization itself. Planning for a successful business enterprise requires that the organization

know itself as well as the environment surrounding it.

There are three fundamental questions that the organization needs to answer to narrow down its

search for business ideas. First, does the organization possess marketable assets? In other words,

is there anything it has, anything it does,or anything it knows that others may find valuable and

worth paying for? Are there assets that might be leveraged to provide a source of revenue?

Second, is there a market opportunity waiting to be seized? Is there some unmet need that

consumers would be willing to pay to have met? Answering this question may require use of

some of the tools we have discussed earlier, including market research and portfolio analysis, as

well as some imagination. The third fundamental question relates to the capacity of the

organization to undertake a new enterprise. Does it have the staffing, the skills, the access to

financial resources, and a culture that will support entrepreneurial activity? As we have said

before, nonprofit enterprise is not for every organization, and it makes no sense to stretch an

already struggling staff to explore something that is just beyond the organization’s capacity to

even consider. In other words, organizations need to be realistic (Community Wealth Ventures,

2001, p. 6).

Figure 14.3 illustrates some types of assets that a nonprofit might possess and that could have

value in the marketplace. Some assets may seem obvious—for example, space. Many museums

rent their attractive spaces for special events, and some have opened restaurants. Underutilized

space might be leased to a commercial retailer, like Starbucks on a university campus, or perhaps

unused offices could be rented for use by other nonprofits. But relationships and access to a

constituency may be assets that can be leveraged, too. In the example mentioned above, First

Book leveraged its relationships with networks of other nonprofits, assets that made it possible to

negotiate favorable financial arrangements with for-profit suppliers whose access to those

markets was not as well established. DC Central Kitchen used what it knew how to do (prepare

food) and what it had (a kitchen) as the basis of new business ventures.

FIGURE 14.3 Leverageable Assets

Source: From Community Wealth Ventures (now Community Wealth Partners) (2001, p. 14).

Feasibility Analysis and Business Planning

Having completed the process described in the previous section and identified some assets that

might be leveraged into business ventures, a nonprofit may proceed to analyze the feasibility of a

selected set of ideas. A feasibility analysisuses many of the tools we have described previously in

this text; it looks both to the market and to the organization’s own capacities (Community

Wealth Ventures, 2004). The external variables that need to be considered include

 the overall size of the market for the product or service that the nonprofit plans to

provide;

 the outlook for the industry in which it will be engaged—for example, whether it is

expanding or contracting;

 competitive factors, including the study of others offering the same or competing goods

and services, as well as generic competition for the same consumer dollars;

 the ease of entry—that is, how much investment will be required to break in; for

example, starting a coffee shop may be relatively easy to do, but setting up a factory to

manufacture complicated electronics would be a more daunting challenge; and

 profitability—whether this is a business in which it is possible to make money or whether

it is, like many restaurants and retail stores, an enterprise that is likely to have a very

small profit margin if any at all.

Looking at itself, the organization needs to ask whether

 the venture fits with its mission;

 the organization possesses the skills and expertise, or capacity, to undertake it;

 its facilities and other material resources are adequate to the challenge; and

 it is prepared to undertake and manage the risk associated with the new activity.

Of the few business opportunities studied in detail, one may be selected for development of a

full business plan. Some nonprofits develop business plans to guide the overall operation of the

organization. Such plans encompass strategy and may be an alternative to traditional strategic

planning, discussed in Chapter 7. This might be the approach taken by an organization that

defines itself as a social enterprise, for which the business model is integral to the overall

strategy. More commonly, business plans are developed with regard to a specific initiative, an

earned income business venture, rather than the organization as a whole. Developing such a plan

is a time-consuming endeavor, and it would not be practical to make such an investment of effort

unless the feasibility analysis has produced an encouraging result. A business plan is a detailed,

comprehensive document that encompasses elements of strategic, marketing, business, and

operational plans. It is an essential tool both internally, to guide development of the business, and

externally, as a sales document for enlisting donors or investors.

Business plans may follow somewhat different formats, but most include the same essential

components. Box 14.1provides a typical outline for a business plan and its major sections. Most

plans begin with an executive summary that gives a thorough but succinct overview of the major

points made in the following sections of the plan. A potential investor or donor should be able to

read the executive summary and have a basic understanding of what the venture entails. Another

section of the plan describes the nature of the business and the products or services it intends to

offer, provides an overview of the industry in which it plans to operate, and summarizes the

strategic plan. A section on management and organization includes the organizational structure

and the backgrounds of key staff and board members.

One key question that needs to be addressed is how the business venture will be related to the

nonprofit itself. Will it operate within the organization, perhaps just as a separate department? Or

will it be organized as a subsidiary with a separate board and management structure? If a

separate entity, will it be organized as a nonprofit or as a for-profit corporation? In the 2008

study by the Duke Center for Social Enterprise, mentioned earlier, 60 percent of nonprofits with

a business venture operated it as a division of the parent organization, 8 percent operated it as a

subsidiary organization that was also a nonprofit, 15 percent had organized the business as a

separate for-profit subsidiary, and the balance had taken other approaches (Community Wealth

Ventures, 2010). All these alternatives have pros and cons, and there are advantages and

disadvantages to each approach. Interesting developments of recent years include the

introduction of new corporate forms, discussed in Chapter 2.

A business plan needs to include a detailed market analysis. What data have been identified,

perhaps during the feasibility study process, to ensure that there is a demand for the products or

services to be offered? Who are the competitors, and what will be the competitive advantage of

the proposed new venture? The 4 Ps of marketing, which readers will remember from Chapter

10, need to be addressed in this section of the business plan.

The products and services should be described in detail. If the business is a retail store, exactly

where will the store be located, how will it be designed, and what types of goods will it carry? If

the business involves manufacturing or distribution, what technologies will be used? How will

customer satisfaction be measured, and how will the quality of the product be controlled?

To set the stage for the financial plan, a section is devoted to summarizing the assumptions on

which financial projections are based. These may include, for example, assumptions about the

economy, about demographics, or about growth in a particular market or industry. Careful

business plans will include a sensitivity analysis that shows how projected results will vary if the

assumptions are wrong by some percentage. For example, if sales are 10 percent less than

forecast or inflation is two points higher than expected, how will the changes in those

assumptions affect the venture’s bottom line?

The financial section of the plan shows proforma income statements, proforma cash flows, and

proforma balance sheets, usually projected for the first three years. Putting this section of the

business plan together is essentially like writing the entries of income and revenue, by date, in

your checkbook—hypothetically looking out into the future. As a result of this exercise, the

business planner should be able to project a point at which the business reaches a break-even

position and then, hopefully, begins to earn a profit.

Although some business plan outlines may arrange sections in a different order, closing sections

usually discuss potential risks and the precautions that the business is taking to protect against

them. For example, risk management may include carrying sufficient insurance or operating the

business venture as a subsidiary organization so as to protect the parent from liabilities it may

incur. An exit strategy may be one aspect of risk management; in other words, if the business is

not viable and needs to shut down, how will that be accomplished in an orderly way while

minimizing risks and losses?

The previous paragraphs have provided a very brief discussion of business plans, but it is a large

topic. Students will find many books devoted to the subject, and software packages are available

to guide the writing of such a plan. Other sources listed at the end of this chapter provide useful

information and materials.

BOX 14.1 ELEMENTS OF A TYPICAL BUSINESS PLAN

1. Executive summary

2. Description of the business

3. Management, organizational structure, key personnel

4. Market analysis and marketing plan

5. Description of products and services

6. Operational plan

7. Financial assumptions

8. Detailed financial plan

9. Uncertainties and risks

10. Plan for growth or exit

Earned-Income Strategies: Issues and Decisions

Readers will recall from Chapter 2 of this book that the growth of earned income ventures or

nonprofit enterprise, what some call the “commercial transformation of the nonprofit sector”

(Weisbrod, 1988), has elicited debate. Some have reacted negatively to specific cases of

nonprofit enterprise that they found to be inappropriate, while others have expressed more

generic concerns about the threat that commercialization may pose to the nonprofit sector and

society.

Sorting Out the Issues

Let’s look at three cases, each of which created a swirl of controversy, and try to sort out the

issues that they raised. In 2006, the Smithsonian Institution and Showtime Networks created a

joint venture, Smithsonian Networks, to produce documentaries using the museum’s archives

and artifacts. The agreement provides Showtime with semi-exclusive rights to some museum

resources. Although an investigation by the Government Accountability Office (GAO) found

that the arrangement did not hamper researchers’ access to the museum’s materials, there was an

outcry of criticism from curators, historians, and the documentary filmmaking community

(Trescott, 2006). Critics raised objections not only to the terms of the arrangement itself, but also

to the fact that as a business contract, some of its provisions would be kept confidential. The

Washington Post editors weighed in:

The Smithsonian argues that the filmmakers in question make money out of their work: Why

can’t the Smithsonian do so, too? Of course it can… but it must be under different rules from a

purely private body. As a quasi-public institution that receives taxpayers’ money, the

Smithsonian is obligated to reveal the details of its business deals to the public. It is also

obligated not to make deals that restrict public access. Charging larger fees when its collections

are to be used for commercial purposes may be acceptable; writing complex, secret rules about

who can use them and who cannot is clearly wrong. (“The Nation’s Attic,” 2006, p. A16)

In 2004, the Museum of Fine Arts, Boston, agreed to lend 21 Monet masterworks to the Bellagio

Casino in Las Vegas. The Bellagio paid the museum a fee of $1 million for its use of the pieces

from the museum’s collection (Edgers, 2004). Critics, including art historians, raised pointed

questions: “Is the MFA’s art available to the highest bidder?” “Should priceless works of art be

displayed in the vicinity of slot machines and … blackjack tables?” (p. A1).

In 2012, The Nature Conservancy entered a partnership with a marketing firm, the Gilt Group, to

promote the annual swimsuit issue of Sports Illustrated. The Nature Conservancy received

payments for products sold in connection with the promotion, including proceeds of a reception

at which members could meet the models for a $1,000 ticket price that benefitted the

Conservancy’s “beaches and oceans conservation work.” Some staff members of the

Conservancy expressed concern about the appropriateness of this relationship (Flandez, 2012b).

All three cases raise legitimate, but somewhat different, issues. For example, the Smithsonian

case raises the question of whether collections, or information, or performances, or other

products or services owned or produced by nonprofit organizations should be available only to

individuals or companies who can pay for them, or whether an institution’s nonprofit status,

especially if the institution also receives public funds, requires it to serve a broader public

interest. If the latter, what is the appropriate balance between that interest and the nonprofit’s

inescapable need for revenue? How can a nonprofit organization engaged in a contractual

relationship with a for-profit entity meet its own responsibilities for transparency and disclosure

while respecting the need of its partner to protect business secrets?

But some criticisms also reflect entrenched traditions and perspectives. Some may find it

inherently offensive to see Monets in a casino, or a Starbucks on a university campus, or a

corporate logo on the entrance to a music hall. Some may find the annual swimsuit issue

of Sports Illustrated to be inherently offensive and the involvement of a respected nonprofit in its

promotion to be inappropriate. However, unless the corporate interest affects what is shown,

what is taught, what is played, or what issues the nonprofit organizations pursues, such concerns

may be more a matter of personal values than a threat to the organization’s mission. Perceptions

do, of course, matter, especially if they might erode confidence in the nonprofit or create the

impression that it no longer needs other sources of support, such as philanthropic giving. But the

issues are often separable, and it is those that relate to the mission that require the most

thoughtful and careful consideration.

Another issue that some have raised is the need for better evaluation of the benefits to nonprofits

from partnerships with corporations. For example, Alan Andreasen (2009) cites a study of a

partnership between Toyota and the Sierra Club in which the benefits to both sides were

monetized, that is, assigned a value in dollars. The total value of the partnership was calculated

to be $12 million, but 83 percent of that value went to Toyota and only 17 percent went to the

Sierra Club. As Andreasen notes, there is a need to improve the metrics by which partnerships

are evaluated so that nonprofits can use the data in negotiating equitable relationships with their

corporate partners (p. 184).

Evaluating Opportunities Against Mission

Leaving aside for the moment the view of those who do not favor the involvement of nonprofits

in commercial activities at all, opinions on the appropriate relationship of the activity to the

mission fall at two poles. Some argue that nonprofits should consider only ventures that are

aligned with their missions and should not undertake activities intended solely to produce

additional revenue. In other words, some say nonprofits should confine their businesses to the

top half of Figure 14.1. For example,

those who hold this view would consider it suitable for a nonprofit group that trains its clients in

culinary skills to start a restaurant business to provide a quality work experience for its

graduates, but would look askance at an environmental organization that opened a restaurant.

(Hochberg, 2002, p. 35)

Others take a different view, arguing that nonprofits should look almost exclusively at whether a

business venture is financially profitable. Since the profits are plowed back to support mission-

related programs, maximizing revenue from the business ultimately helps deliver more and better

services to clients, thus serving the mission. In addition, some say, even successful business

ventures that are not related to the mission may create a halo effect that brings other benefits to

the nonprofit, including greater visibility and the ability to attract and retain capable staff

(Hochberg, 2002). But the question may involve more shades of gray than these two positions

encompass.

The economist Dennis Young (2006b) provides a useful framework for decision making, which

is illustrated by Table 14.1. Young’s model helps in thinking through the risks and rewards of

possible partnerships or business ventures. As the table suggests, a profitable opportunity is

worth exploring if it also supports the mission or if its impact on the mission is neutral. The

former would seem to offer the best of all possible worlds. In the latter case, nothing really is

lost, and additional revenue may be gained. However, an activity that could be profitable but that

threatens the mission surely would require the most exacting of scrutiny. If it offered the

possibility of a huge gain in revenue that would make it possible to greatly expand mission-

related programs, with considerable benefit to the organization’s clients, then a nonprofit might

consider it, making adjustments to manage the mission risk.

Source: Young (2006b).

What about a partnership or business venture that would just break even financially? If it

enhances the mission, then it makes sense to explore it. It may be an opportunity to expand

mission programs and services, totally supported by new revenue. If the new venture would just

break even while having no impact on the mission, it might seem to be nothing more than a

potential distraction that has little to offer. It would best be avoided unless it could be tweaked in

some way to either produce more profit or better serve the mission. A break-even business that

threatens the mission offers nothing, except for those who may be feeling masochistic.

Undertaking a business that loses money while either having no impact on the mission or

actually threatening it may appeal only to nonprofit managers who are, indeed, professionally

suicidal. Unless such possibilities can be redesigned to overcome their shortcomings, they are

most certainly best avoided.

Finally, there is the possibility of a partnership or business venture that actually generates a

financial loss but contributes in some way to advancing the mission. A nonprofit might consider

engaging in that activity, but it would need to be thought about carefully. The benefits and costs

of the proposed venture would need to be weighed against those of alternative activities that

might SERVE the mission equally or better, at the same or a lower cost.

A Continuing Debate

There is a continuing debate regarding commercialization in the nonprofit sector and the relative

value of earned income and philanthropy as sources of nonprofit revenue. For example, an article

in the Harvard Business Review(Foster & Bradach, 2005) argued against encouraging nonprofits

to pursue “the holy grail of earned income,” saying that “sending social service agencies down

that path jeopardizes those who benefit from their programs—and it harms society itself, which

depends for its well-being on a vibrant and mission-driven nonprofit sector” (p. 100). Just

months before, the economist Burton Weisbrod (2004) had argued in the Stanford Social

Innovation Review that Congress should discourage nonprofits from undertaking business

ventures and instead should increase the tax incentives to donors for philanthropy. Angela

Eikenberry and Jodie Kluver (2004), in the Public Administration Review, made the case that,

though marketization may be beneficial for the short-term survival needs of nonprofit

organizations, it may have negative long-term consequences. Marketization may harm

democracy and citizenship because of its impact on nonprofit organizations’ ability to create and

maintain a strong civil society. (p. 132)

Others argue that earned income is preferable to nonprofits’ dependence on philanthropy and

government support and that shifting to an earned-income model makes an organization more

sustainable and effective. Thomas Lyons and colleagues (2010) write that “philanthropy, alone,

is not sustainable” and the executive director of the Global Good Fund argues that moving

toward reliance on earned income makes an organization more nimble and adaptable, attracts

talented people to the staff, opens doors to corporate partnerships, and permits the organization’s

“growth and impact [to] become accelerated and exponential” (Rich, 2014). But such authors

sometimes minimize the fact that running a business can be no less demanding of effort and

attention than traditional fundraising or grantsmanship and that sustainability of a business

enterprise itself is far from guaranteed. In addition, there are examples of nonprofit organizations

that have developed a base of donors that has sustained them well for many years.

But some critics of earned income are extreme in their alarms. For one, their writing sometimes

implies that the nonprofit sector is synonymous with social service agencies, not acknowledging

that many nonprofits, including colleges, schools, performing arts groups, health care

institutions, and many others, long have generated earned income as a major portion of their

revenue without apparent abandonment of their missions or the loss of philanthropic support.

Nor do the critics always acknowledge that as many as 90 percent of nonprofit business ventures

conducted by nonprofits that do provide human and social services are “directly or closely

related to their missions” (Hochberg & Wise, 2005, p. 50). These include Girl Scout cookie sales

and Goodwill and Salvation Army thrift shops, which have long been significant components of

their respective organizations’ revenue without inflicting apparent harm.

Some critics also do not sufficiently acknowledge the substantial dependence of many nonprofits

on government support and the implications of changed policies that have forced them into

competitive situations. Nonprofits’ responses are sometimes portrayed as capitulation to the

market rather than accommodation to the realities that public policy has thrust on them. It is

reasonable to ask if their clients and society would be better served were the nonprofits forced

from existence by rigid adherence to traditional methods of revenue generation. Increased

incentives to philanthropy do not offer a realistic alternative to meeting nonprofits’ financial

needs, for a variety of reasons that go beyond the scope of this discussion. And, it must be

acknowledged, even small nonprofits are increasingly dependent on major gifts from a relatively

low number of donors, a situation that presents no less of a threat to their autonomy than their

partnerships with the for-profit sector.

As noted at previous points in this text, this author recommends a balanced perspective. Earned

income offers one way for nonprofits to obtain revenue and to diversify sources, managing the

risks inherent in reliance on philanthropy and government alone. It will be a more appropriate

and useful strategy for some organizations than for others. Some may rely entirely on earned

income, but for most it is one component of a diversified funding base, together with

philanthropy, government funds, and earned income from core mission programs. Indeed, some

nonprofit organizations that long have been reliant on earned income are increasing their efforts

to obtain philanthropic support, with the goal of creating a more balanced revenue profile.

Opportunities for earned income always need to be evaluated against their impact on

achievement of the mission (as shown in Table 14.1). Those that threaten it generally should be

avoided. Others may serve both financial and mission goals. Some may provide income to

advance the mission from activities that bear no relationship to it but also do it no harm. Leaving

aside the tax implications of unrelated business income, which we discussed earlier in this text,

that is really no different in its ultimate effect from investing endowment funds in the stock of

companies and using the dividends to support charitable purposes, a practice in which many

nonprofits engage without arousing much complaint.

It is ultimately the responsibility of the nonprofit’s board to establish, after thoughtful reflection

and discussion, policies and guidelines, rooted in the organization’s mission and values, against

which such decisions will be made. Those policies should take into consideration mission-

related, financial, and public relations risks; they need to be in place before the organization

enters into new partnerships or ventures, and not put together as a response once the editorialists

are at the door.

Chapter Summary

Although nonprofits in some sectors have long derived a major portion of their revenue from

earned income, that is, fees for goods and services they provide, there has been an increased

emphasis on such activities in recent decades. Terminology varies in the literature of the field,

but this book adopts the term earned-income strategies to encompass a variety of partnerships

between nonprofits and corporations as well as business ventures undertaken by nonprofit

organizations themselves. The latter activities are also called social enterprise, although that term

is used in various ways by different people. Nonprofits engage in such activities to increase and

diversify sources of revenue and to advance their missions and gain other benefits. Although

some writers imply that it is, the pursuit of earned income is not necessarily synonymous with

being a social entrepreneur. Because social entrepreneurship is a broader concept than earned

income, it is considered as a separate topic in Chapter 16 of this book.

This chapter discussed four types of relationships between nonprofits and corporations that are

among the most common. Licensing agreements permit a company to use a nonprofit name or

logo on its products in exchange for a royalty paid to the nonprofit. Sponsorships are

arrangements by which a corporation contributes to support an event, facility, or organization in

exchange for the prominent association of its name or logo. It is not the same as advertising

because it does not include descriptions or depictions of the company’s products. Cause-related

marketing (or just cause marketing) refers to partnerships in which a nonprofit is paid a fixed

amount per sale or a percentage of total sales of a company’s product, usually in connection with

a short-term promotion. This type of relationship became popular following a very successful

arrangement in 1983 whereby American Express made a payment to the Statue of Liberty

campaign each time its credit card was used.

Some nonprofits have operational relationships with companies, often as suppliers or sources of

workers. Others have entered joint ventures with corporations; that is, they have become partners

in the ownership and operation of a new business. Successful nonprofit–corporate partnerships

are built on commonality of values and interests. There is usually a logical connection between

the company’s products or target markets and the mission and programs of the nonprofit.

Some nonprofits have launched their own business ventures; most provide services, manufacture

products, or are in the fields of retail or distribution. Examples include DC Central Kitchen,

which established a catering business based on the use of its kitchen facilities and the

employment of homeless people enrolled in its culinary training program. Triangle Residential

Options for Substance Abusers (TROSA) requires clients to work in one of seven businesses,

engaged in moving, brick masonry, catering, commercial and residential painting, lawn

maintenance, picture framing, or retail sales (www.trosainc.org).

Nonprofits begin to identify business opportunities by inventorying their assets—things they

have, things they do, or things they know. Assets may be tangible, such as space, or may include

relationships with particular constituencies, knowledge of specific cultures, or the organization’s

reputation and brand. Once it has identified assets that might be used to produce earned income,

the organization analyzes the feasibility of using a select few of them. The feasibility analysis

looks both inside the organization, to ensure that it has the capacity to undertake the venture, and

outside, to gain knowledge of market demand and competitors.

Some nonprofits develop a business plan to guide the overall organization, but others only do so

with regard to a specific business venture. Development of a full business plan is an intensive

and time-consuming effort and likely will be undertaken only for the most promising of business

opportunities that have been identified. There are many formats for a business plan, but most

include an executive summary, a description of the business, a market analysis and marketing

plan, a description of the products and services to be offered, an operational plan, clarification of

financial assumptions, a detailed financial plan and projection of cash flow for at least the first

three years, a summary of uncertainty and risks and plans to manage them, and a plan for growth

or exit from the business.

Nonprofits’ efforts to increase earned income have generated controversy. Some critics raise

legitimate issues about the impact of commercialization on nonprofits’ commitment to mission.

Others reflect traditional views of what are appropriate activities and revenue sources for

nonprofit organizations. Dennis Young (see Table 14.1) offers a framework for evaluating

nonprofit enterprise opportunities that may be profitable, break-even, or money losing, each in

terms of whether it advances the mission, is mission neutral, or mission threatening. Ventures

that threaten the mission usually should be avoided.

Some see commercialization of the nonprofit sector as desirable, and others see it as a threat to

democracy and civil society. This book advocates a balanced perspective, in which nonprofit–

corporate partnerships and nonprofit business ventures offer one way to increase and diversify

revenues. A well-managed nonprofit seeks a balanced portfolio of revenue streams, from earned

income, philanthropy, and possibly government sources. Nonprofit boards have a responsibility

to develop policies and guidelines to ensure that earned-income activities are consistent with

their organizations’ mission and values and that financial and public relations risks also are

weighed.

KEY TERMS AND CONCEPTS

 business plan

 cause marketing

 cause-related marketing

 commercialization

 contributed income

 earned income

 feasibility analysis

 joint ventures

 licensing agreement

 nonprofit business ventures

 nonprofit enterprise

 sensitivity analysis

 social enterprise

 sponsorship

CASE 14.1 Minnesota Public Radio

In 1969, William Kling, then age 26, was managing a radio station at St. John’s Abbey and University in Minnesota.

He hired a young man named Garrison Keillor to host a classical music program in the morning. Kling then moved

to Minneapolis–St. Paul to start a radio network, Minnesota Public Radio (MPR), taking Keillor with him. Keillor

introduced a show he called Prairie Home Companion,which by 1978 had developed a cult following. In 1981,

Keillor offered his listeners a free poster and over 50,000 requests came in. Offers of T-shirts and other products

soon followed and sales were highly successful (Gallagher, 2001). At the same time, the Reagan administration was

encouraging public broadcasting to become less reliant on federal funds and to begin seeking more earned income

(Gallagher, 2001). MPR soon created Rivertown Trading Company as a wholly owned subsidiary to handle the

growing sales of Prairie Home Companion items, which reached $200 million by 1998. For a time, Rivertown

remained a nonprofit, fully owned by MPR (Phills & Chang, 2005).

But the organizational structure continued to evolve and become more complex, and the issue of unrelated business

income became a concern for MPR. Faced with the risk that the IRS could challenge its nonprofit status because of

its growing commercial revenues, in 1987, a reorganization was undertaken. Minnesota Communications Group

(later renamed American Public Media Group) became the parent organization and was a nonprofit. It owned both

the nonprofit MPR and a for-profit company called Greenspring, which encompasses Rivertown Trading and other

for-profit enterprises established by MPR. The for-profit businesses produced dividends and royalties that supported

MPR (Miller, 1998). MPR continued to grow, building a regional network that rivaled the larger National Public

Radio. By 2004, MPR had an operating budget of $47 million, a network of 38 stations, and 650,000 listeners (Phills

& Chang, 2005, p. 66). William Kling continued to serve as CEO of both nonprofit MPR and for-profit Greenspring,

and other senior officers also held dual roles with both organizations. These relationships eventually became

controversial.

Kling described MPR’s earned income initiatives as “social purpose capitalism” and was recognized with numerous

awards. But some charged that his aggressive tactics were all about money and also questioned the level of his

compensation. He was paid by both MPR and Greenspring; for example, in 1998 he received $69,200 from MPR

and an additional $429,155 from Greenspring, which some thought to be too much for a nonprofit executive (Miller,

1998). Others defended Kling’s compensation as reasonable considering the scope of the enterprises he managed

and pointed to the fact that other nonprofit executives in the state were paid even more (Phills & Chang, 2005, p.

69). A different issue arose in 1995 when executives of American Public Media asked MPR employees to volunteer

to help prepare Rivertown holiday orders for shipping. Some said this was improper use of nonprofit resources to

benefit a for-profit company. Kling defended the activity, noting that all Rivertown profits went back to benefit

nonprofit MPR. The attorney general of Minnesota investigated the case and ultimately agreed with Kling (Phills &

Chang, p. 68).

Controversy was heightened when, in 1998, Greenspring agreed to sell Rivertown Trading to the department store

chain Dayton Hudson for $120 million. A total of $90 million went to MPR’s endowment. Kling described the

transaction as “converting an operating asset to an endowment asset,” which would provide more security to MPR in

case Rivertown’s profits would decline (Phills & Chang, 2005, p. 70). Kling and other senior executives also had

worked out arrangements that provided them with personal bonuses when Rivertown was sold. Kling received $2.6

million (Abelson, 1998). Some said the case was an example of personal enrichment accomplished through the use

of public funds that had, in part, supported development of MPR’s popular programs, on which Rivertown’s sales

were based (Abelson, 1998). The Minnesota Attorney General determined that Kling and the other executives had

done nothing wrong.

MPR continued to expand and prosper. By 2007, it had taken over additional radio stations, sometimes generating

controversy in local communities (Hall, 2007). It also completed a successful capital campaign that raised $56

million, increased corporate sponsorship, and built its base of individual donors to 94,000 (Hall, 2007). Kling

continued to serve as CEO of MPR and Greenspring, which expanded into other revenue-generating endeavors,

including several magazines and a social-networking site (Hall, 2007). MPR’s endowment had grown to $170

million by 2007, making it one of the largest in public radio. As Kling described the situation, “We have very nice,

diversified revenues. We’ve earned about $275 million from for-profit activities for the benefit of the nonprofit. If

you have that kind of boost, it is an extra advantage” (Hall, 2007, n.p.).

Questions Related to Case 14.1

1. What were the principal issues raised by the case of Minnesota Public Radio?

2. What does the MPR case suggest about the best ways to structure the relationship between a nonprofit and its

earned-income venture?

3. Some people fear that if a nonprofit gains too much earned income, its traditional donors will stop giving. What

does the case of MPR suggest about this issue?

CASE 14.2 Aspire CoffeeWorks

In 2007, James Kales was appointed as the CEO of Aspire of Illinois, a nonprofit located in the suburbs of Chicago

that assists people who have developmental disabilities. Aspire offers programs that include therapy, group homes,

clinics, and preparation for employment. Although he had previously served as the CEO of a Big Brothers Big

Sisters affiliate, he knew he would face larger challenges at Aspire, with a much larger budget and ten times the staff

of his previous employer. Although Aspire had been in existence for 50 years, it was facing stagnant government

funding, which accounted for 90 percent of its revenue. Kales would need to find new and more diverse sources of

financial support (Glenn, 2007).

Meanwhile, the economy was about to sink into a major recession that would make philanthropic fundraising more

difficult. Kales started to think about earned income as a possible source of increased revenue and perhaps also a

strategy to create jobs for people with disabilities. With a grant from the UPS Foundation, he and his staff started

exploring possibilities. In a meeting one morning, they were all drinking coffee and the idea hit: how about coffee?

They began researching the coffee market, studying both low-priced and upscale coffee brands, analyzing trends in

coffee price, and looking for a niche that Aspire might be able to fill (Frechette, 2011).

Just a few years earlier, Tony Dreyfuss had launched a new business in Chicago. He had worked at a coffee shop

while a graduate student and had learned the business, working his way up to a management position. In 2003, with

his father as a partner, he established Metropolis Coffee Company. The company operates a café, roasts coffee in

small batches to fit customers’ preferences, and sells coffee retail to grocery stores. The company features coffee

that is hand-roasted, organic, and purchased according to fair-trade principles (www.metropoliscoffee.com).

Kales’s market research led him to discover Metropolis and he called Tony Dreyfuss to propose a partnership.

Dreyfuss’s response was positive. “Where have you guys been?” he asked, adding “We’ve been looking for an

opportunity like this!” After some further discussion, Aspire CoffeeWorks was launched in 2009 (Frechette, 2011).

Aspire CoffeeWorks is not a separate company; it is a partnership of Aspire and Metropolis that generates profits

that go entirely to support Aspire’s program serving people with disabilities

(www.aspirecoffeeworks.com/learn/company). The coffee is produced by Metropolis under the Aspire brand.

Aspire-branded coffee is sold in store like Whole Foods at a modestly higher price than the Metropolis-branded

coffee, providing additional revenue to Aspire and also a choice for socially conscious consumers who wish to

provide support for people with disabilities (Frechette, 2011).

Aspire clients work side by side with Metropolis staff, grinding the coffee, weighing it, packing it, calculating

inventory, and shipping it (Frechette, 2011). But there is more to Aspire’s strategy than providing these jobs; it also

advances the goal of bring people with disabilities out of a sheltered work environment into the real world, where

they learn to develop skills that they may be able to take to other employers. Aspire provides additional training as a

part of the CoffeeWorks program and, indeed, some Aspire workers have been hired in full-time jobs with

Metropolis (Frechette, 2011).

In 2013, Aspire’s total revenue was over $11 million. Program service revenue (earned income) accounted for $9.3

million, including $112,396 from Aspire CoffeeWorks. Government grants totaled $391,000; gifts and other grants

accounted for another $680,000 (Aspire of Illinois, 2013 Form 990).

Aspire has continued to develop partnerships with businesses, including Groupon and Office Max, which sells

Aspire coffee for use in commercial settings. Aspire advises other nonprofits to see companies not just as donors,

but as potential business partners, and emphasizes the importance of approaching potential partners with a proposal

that brings benefits to their bottom lines as well as serving the nonprofit’s cause (Ronquillo, n.d.).

Questions Related To Case 14.2

1. What was the asset that Aspire of Illinois leveraged to create a source of earned income from Aspire

CoffeeWorks? Was that asset something it had, something it did, something it knew, or some combination of these?

2. How important is it that Aspire CoffeeWorks helps to advance Aspire’s mission? Would it have made sense to

undertake if it only provided a source of revenue not directly related to the mission?

3. Why do you think Metropolis was interested in the partnership with Aspire? What does it stand to gain?

4. What might be some risks of the partnership to Aspire and to Metropolis?

QUESTIONS FOR DISCUSSION

1. Some well-known nonprofit–corporate partnerships are listed below. In each case, what

do you think is the logic behind the relationship; in other words, why does this

relationship make sense? What may be the principal benefits that each party receives as a

result of the partnership? Do you see any possible issues or problems related to each of

these relationships?

o Neutrogena sells sunscreen with the American Cancer Society logo.

o The Sierra Club endorsed a new line of environmentally friendly cleaning

products from Clorox, called “Green Works,” in exchange for a fee (Jensen,

2008).

o Microsoft created technology centers at Boys & Girls Club locations.

o Christmas in April is a nonprofit that renovates homes for the elderly and

disabled. The Home Depot has provided the organization with training for its

volunteers, assistance from The Home Depot employees, and lines of credit for

merchandise at its stores, as well as cash gifts.

o In 2010, Susan G. Komen for the Cure, a nonprofit organization that works to

fight breast cancer through research, community health outreach, and advocacy,

and restaurant chain KFC (formerly Kentucky Fried Chicken) initiated a

promotion called “Buckets for the Cure.” KFC agreed to give Komen 50 cents for

every special pink bucket of chicken purchased by the operators of their

restaurants from April 5, 2010, through May 9, 2010 (Huget, 2010).

2. Some well-attended exhibits at art museums have included collections of automobiles,

motorcycles, and photographs of rock stars. Are these appropriate subjects for exhibition

in a nonprofit art museum? Why or why not? Do they put the museum’s mission at risk—

in the short term or long term? Why or why not?

3. The Cystic Fibrosis Foundation invested $150 million in a small biotechnology company

to support development of new drugs to treat the deadly lung disease with which the

Foundation is concerned. In 2014, the Foundation announced that it would receive $3.3

billion from selling the right to royalties related to the new drugs that were developed, an

amount twenty times its annual budget. Some people said the investment helped produce

needed new drugs and also fund future research. They said it should be a model for other

disease-fighting nonprofits. Other people noted that use of one new drug would cost a

patient $300,000 per year and said that the Foundation should have done more to push for

lower prices. Critics argued that charities should support academic research but that it is a

conflict of interest for an organization like the Cystic Fibrosis Foundation to invest in

research by a company when it stands to gain financially. What is your opinion? (Source:

Pollack, 2014)

SUGGESTIONS FOR FURTHER READING

Books

Lane, M. J. (2015). Mission-driven venture: Business solutions to the world’s most vexing

problems. Hoboken, NJ: Wiley.

La Piana, D., Gowdy, H., Olmstead, R., & Copen, B. (2012). The nonprofit business plan: A

leader’s guide. Nashville, TN: Turner Publishing.

Social Enterprise Alliance. (2010). Succeeding at social enterprise: Hard-won lessons for

nonprofits and social entrepreneurs. San Francisco, CA: Jossey-Bass.

Yunus, M. (2010). Building social business: The new kind of capitalism that serves humanity’s

most pressing needs.Philadelphia, PA: PublicAffairs.

Websites

Duke University Center for the Advancement of Social

Entrepreneurship: http://www.caseatduke.org/

Social Enterprise Alliance: https://www.se-alliance.org/

Also see suggested readings on social entrepreneurship at the end of Chapter 16 of this book.

Companion Website

Visit study.sagepub.com/worth4e for access to certain full-text SAGE journal articles and links

to relevant video and multimedia content.

15 Government Grants and Contracts 
Chapter Outline 
 Changes in Sources and Patterns of Support 
 Grants, Contracts, and Fees 
 Government Support: Opportunities and Challenges 
 Seeking Government Support 
o Identifying Grant Opportunities 
o Evaluating Grant Opportunities 
o Preparing and Submitting an Application or Proposal 
 Nonprofits in the Policy Arena 
 Chapter Summary 
 
Government support is a significant component of revenue for the nonprofit sector. 
Photo: iStockphoto.com/GaryBlakeley 
Learning Objectives 
After reading this chapter, students should be able to: 
1. Define grants, contracts, and fees. 
2. Describe the differences between grants and contracts. 
3. Describe the differences among various types of government contracts. 
4. Identify the benefits and risks for a nonprofit organization in receiving government 
support. 
5. Identify principal sources of information on the availability of government grants and 
contracts. 
6. Analyze cases, applying concepts from the chapter. 
Nonprofits interact with government in various ways, and the relationship is often complex. 
Theorists have identified three basic models of how nonprofits relate to government: as 
supplementary to government, as complementary to government, and as adversaries of 
government. In the supplementary model, nonprofits provide public goods to fill gaps left by 
government programs and services, as discussed in Chapter 3. In this case, nonprofits use private 
resources to provide goods and services to address public purposes to which government has not 
fully responded, possibly for various reasons, and their efforts thus supplement those of 
government. In the complementary model, nonprofits work with government. Nonprofits use 
government funds, perhaps combined with private funds, to provide goods and services that the 
government desires but may not be able to fully provide as effectively or efficiently itself. Third, 
sometimes the relationship between nonprofits and government is adversarial. Nonprofits may 
oppose current government policy and advocate for change. Going in the other direction, 

government monitors and regulates nonprofit activities. This is adversarial in the sense that if a

nonprofit violates the law or regulations, the government may impose penalties or sanctions

(Young, 2006a, p. 40).

In the taxonomy of these three possible nonprofit–government relationships, this chapter is

focused on the complementary model. It discusses various ways in which nonprofits may seek,

receive, and manage public funds to support their programs. Chapter 11 discussed the role of

nonprofits in advocacy and lobbying; government regulation of nonprofit activity has been

discussed at various points in preceding chapters in this book.

Government funds comprise a significant portion of revenue for the nonprofit sector. In 2010,

almost one third of nonprofit revenue came from public sources, including 8.9 percent from

grants and 23.2 percent in the form of payments for goods and services (Roeger, Blackwood, &

Pettijohn, 2012). And these data understate the overall impact of government because they do not

include such benefits as tax exemption, the tax deductibility of charitable gifts, and nonprofits’

access to tax-exempt bonds as a source of capital, loan guarantees, and a variety of other indirect

subsidies that government provides to the nonprofit sector (Smith, 2006).

The impact of public funds varies significantly among the charitable subsectors. For example,

the largest portion of government funds is received by hospitals and other nonprofit health care

institutions in the form of reimbursements under Medicare and Medicaid. And government

payments represent 65 percent of funding for human service organizations (Boris, deLeon,

Roeger, & Nikolova, 2010). In contrast, public funds are a relatively small portion of revenue for

arts and cultural organizations.

Changes in Sources and Patterns of Support

There have been significant changes in government funding of nonprofit activity over the past 35

years. Government funding to nonprofits increased substantially in the 1960s, with the

introduction of Medicare and Medicaid, community actions agencies, community mental health

centers, neighborhood health centers, and child protection agencies. Major federal student aid

programs, the National Endowment for the Arts, and the National Endowment for the

Humanities also were created in that decade. In the 1970s, new programs emphasized drug and

alcohol treatment programs, battered women’s shelters, rape crisis programs, and emergency

shelters for runaway youth. In the 1980s, new federal funding addressed the emerging issues of

AIDS, homelessness, and hunger.

During the Reagan administration in the 1980s, direct federal spending on social services and

programs was curtailed, in part by devolving responsibility to states and converting federal

funding into block grants, which permit states the flexibility to allocate the money to meet local

needs. Many states also expanded their spending, either by using their own funds or finding new

ways to tap federal programs, for example, by redefining some human needs as medical

conditions in order to qualify for coverage under Medicaid. Thus, while patterns and vehicles of

funding have changed, total government support of nonprofit activities has increased over the

past 25 years (Smith, 2010, p. 221).

When government funding is mentioned, some people may think primarily of the federal

government. But the reality is more complex. Some well-known programs, for example food

stamps, are state administered, although entirely funded by the federal government. Others, such

as Medicaid and Temporary Assistance for Needy Families (TANF) are state administered and

funded through a mix of federal and state funds. In some states, counties and municipalities act

as agents for the state in administering programs and some local governments also provide funds

directly to nonprofit organizations. Many nonprofits work with multiple government funders at

various levels simultaneously. For example, a 2009 study of human service nonprofits found that

75 percent had more than one government grant or contract and 50 percent received funding

from all three levels of government (Boris et al., 2010). Because nonprofits’ Form 990 reports

revenue from government without breaking it out into federal, state, and local, and in view of the

complexity of how funds may be distributed among various levels of government, it is not even

possible, based on that source of information, to identify how much of nonprofit revenue has

been passed through from the federal level and how much represents direct state or local funds

(Bowman & Fremont-Smith, 2006). As sources of government resources have become more

diverse and funding mechanisms more complex, nonprofits have been required to develop a

sophisticated understanding of multiple application and reporting processes (Smith, 2006, pp.

221–222).

Grants, Contracts, and Fees

To refresh our understanding of distinctions that were discussed in Chapter 8, the terms cross-

sector collaboration and public–private partnership are widely used, sometimes loosely to

describe any activity in which both government and a private entity are involved. But a grant or

contract awarded by government to a nonprofit is not a partnership. A partnership is a principal–

principal relationship, in which the parties share risks and rewards. For example, a local

government and a private real estate developer might reach an agreement for the developer to

construct a public building on government land in exchange for the right to include apartments

and retail space that the developer would lease in the commercial market. But when nonprofits

are merely government contractors, that is, more like a principal–agent relationship, in which the

power lies primarily with the funder (Gazley & Brudney, 2007; Smith, 2010, p. 560). This

chapter is concerned with government grants and contracts received by nonprofit organizations

rather than the cross-sector collaborations and partnerships discussed in Chapter 8. Government

funds may reach a nonprofit’s accounts in three primary ways, including

through grants (or grants-in-aid) made directly to the organization; as payments under contracts,

requiring the nonprofit to provide specific goods or services to the government or its citizens;

and indirectly through vouchers or voucher-like benefits that are awarded to individuals and

which they may expend to pay fees for service at providers of their choosing. The latter is the

case, for example, with Medicare, student aid grants, and some social programs, such as child

care and job training. In this instance, nonprofits do not secure public funds by applying to the

government; rather, they often must compete for clients, with other nonprofit providers as well as

for-profit firms. Such cross-sector competition is common in certain subsectors, for example

health care, nursing homes, child care, and increasingly, education.

Although individuals possessed of voucher-type benefits may choose where to use them, all

organizations or companies must meet government requirements in order to be eligible to serve

clients whose fees are paid with public funds. For example, in 2011, the U.S. Department of

Education implemented requirements on colleges and universities known as the gainful

employment rule. Under this requirement and based on the loan repayment rates and debt loads

of graduates, some institutions could be deemed ineligible to enroll students using federal aid.

The purpose was to prevent disreputable educational institutions or companies from enrolling

unqualified students, in order to receive tuition paid with grants or federally guaranteed loans

and then failing to provide them with the skills necessary to obtain employment, leaving them

with high debt that they might be unable to repay. The regulation was especially controversial

with for-profit schools but also held implications for nonprofit educational institutions (Nelson,

2012). In response to criticisms, the 2011 rule was revised in 2014 (www.acenet.edu/news-

room/Documents/Gainful-Employment-2014-Proposed-Rule-Summary.pdf).

Grants and contracts are two mechanisms through which nonprofits may receive government

funds directly. Although there are many similarities, grants and contracts are different in the

restrictions and accountability requirements placed on the recipient. A grant is an award of

money made by the government with the hope that a public purpose will be achieved, but the

services are not provided to the government. A grant may be paid upfront or in regular

installments. The recipient organization generally has some flexibility in the use of a grant and

the required reporting is usually less detailed than for a contract. The recipient of the grant is, of

course, obligated to spend the money for the designated purpose and must provide evidence that

the funds were properly applied. But failure to achieve a result, despite diligent effort, is likely to

result only in the inability to secure future grants rather than nonpayment or punitive actions.

Grants are often short term, covering perhaps one project, for example, a research study,

purchase of equipment, or development of a new program or facility.

A contract is a legal agreement, in which the recipient of the payments is obligated to provide

specific goods or services to the government and often to achieve defined results. Failure to

provide the goods or services described in the contract would be more than a disappointment; it

would be a breach of contract possibly involving legal remedies and penalties. Thus, when

government makes a grant to a nonprofit, it is in a sense a “donor,” meaning that the government

is expecting that the funds will have a positive impact, but is unlikely to become involved in

implementation of the program or project. But when government contracts with a nonprofit to

provide goods or services, it is more a “customer” of the nonprofit and may refuse to pay or take

its business elsewhere if its performance requirements are not met.

The government decides upfront whether its purposes will be best served through a grant or a

contract. The Federal Grant and Cooperative Act of 1977 provides standardized questions that

are used to make this determination. The questions relate to whether the government is the direct

beneficiary of the activity or whether the project is serving the organization’s own purposes,

whether the government has determined the specifications for the project or is just providing

financial support to a project designed by the organization, and whether the government has

identified the needs or is just supporting the project because it is generally complementary to the

mission of the agency involved (Pettijohn, 2013b). It is important for potential contractors to

understand that federal government contracts are subject to the Federal Acquisition Regulation

(FAR), issued by the Office of Management and Budget (OMB) and by the Competition in

Contracting Act (Pettijohn, 2013b). But grants are not covered by these laws. Federal agencies

thus have more discretion in selecting recipients of grants than they do in awarding contracts, but

for the nonprofit organization, this flexibility cuts two ways. If an organization thinks that it has

been treated unfairly in the award of a federal contract, it can appeal to the Government

Accountability Office (GAO). But the nonprofit does not have the same right to appeal if it does

not receive a grant (Pettijohn, 2013b, p. 6).

If the government decides to undertake a contract, there are various types. As summarized

in Box 15.1, these types vary according to the circumstances under which the contract is

awarded, the extent of government oversight, and the risks to the contractor (Pettijohn, 2013b).

Thus, the nature of the contract is something that a nonprofit manager needs to clearly

understand in order to weigh the potential benefits and risks involved.

BOX 15.1 TYPES OF GOVERNMENT CONTRACTS

Source: Pettijohn, S. L. (2013a). Federal government contracts and grants for nonprofits (Brief 01). Washington, DC: Urban Institute. Retrieved

January 19, 2015, from http://www.urban.org/UploadedPDF/412832-federal-government-contracts.pdf

Government Support: Opportunities and Challenges

Nonprofit organizations and government have a shared interest in working together, and both

reap benefits. Many nonprofits would find it difficult or impossible to replace government funds

with philanthropy or earned income, at least in the short run, and government would find it

difficult or impossible to provide services directly if nonprofit organizations did not exist. From

the perspective of government, contracting with nonprofits offers the potential to reduce costs,

increase efficiency, and enhance choice for those who receive services. For nonprofits,

government funding may provide not only increased revenue but also legitimacy in the

community and the possibility of having greater impact on important social problems (Smith,

2006, p. 553).

A study published in 2012 found that nonprofits may have competitive advantages over for-

profits in securing government contracts (Witesman & Fernandez, 2012). Public officials

perceive that the public-interest purposes of nonprofits more closely align with the purposes of

government than do the financial incentives of for-profits and therefore hold a greater trust in

them. Nonprofits may have closer relationships with local officials and their communities than

do for-profit firms. They may be less costly than for-profits, and their dependence on

government contracts may make them more eager to be flexible and responsive to government

officials (p. 5). Understanding that for-profits primarily serve the interests of their owners

(shareholders), public officials may be concerned that they will reduce costs contrary to the

government’s desire to maximize the benefit of services provided and that they will use any

discretion in the contract to enhance profit rather than the impact of programs (p. 4). However,

the priorities of nonprofits and government may not be perfectly aligned. Some nonprofits will

be interested in a particular constituency rather than the broad public interests served by

government and the fact that some organizations manage multiple contracts may provide an

incentive to try and shift from one activity to another. And, of course, from the perspective of

government officials awarding contracts, the ideological or political perspective of some

nonprofits may be a cause for concern (p. 4). Nevertheless, scholars Eva Witesman and Sergio

Fernandez (2012) conclude that government officials do trust nonprofits more, monitor them less

than they do for-profits, and award them contracts for longer periods, especially when the nature

of services includes task uncertainty (p. 1).

Despite the attractions and benefits of working with government, according to Elizabeth Boris,

Erwin de Leon, Katie Roeger, and Melina Nikolova (2010), nonprofit organizations that receive

public funds also may face some challenging realities, which include the following:

 Some government grants require nonprofits to obtain matching funds from other sources

to cover a portion of the program costs. This may mean that some of the organization’s

fundraising capacity or earned income may be diverted from other purposes.

 Government funds are often inadequate to fully cover the organization’s indirect

costs, that is, the nonprofit’s general administrative expenses (e.g., rent, fundraising, etc.)

or even the costs of the supported program. Government agencies are often inconsistent

in defining administrative costs, making them difficult to allocate between funded

programs and general management.

 Government contracts and grants may involve uncertainty. For example, awarding of a

contract may be delayed, forcing the nonprofit to identify other sources of funding in

order to maintain ongoing services, without assurance that the government ultimately will

pay at all. Other times, even when the contract has been awarded, the receipt of payments

may be delayed. In a 2010 study, according to Boris et al., this was found to be more of a

problem with state and local governments than with the federal government and may

have reflected the serious financial pressures facing those entities that year.

 In some cases, the terms of contracts can be changed unilaterally by the government

agency after they have been approved.

 The costs of administering the grant or contract itself, including the development of

proposals, recordkeeping, and reporting are seldom covered by the award.

 Contracts are increasingly performance based, meaning that payment and renewal are

contingent on meeting outcomes goals. This raises the risk that a contract will be

terminated or that payment will be less than the nonprofit anticipated (Smith, 2010).

Research studies, including those conducted by the federal Government Accountability Office,

have found that these realities are not the exception, but rather are common across agencies and

states, especially with regard to nonprofits that provide human services (Boris et al., 2010). In

light of these problems, scholars at the Urban Institute have offered the following

recommendations to government and nonprofits on how to improve their relationships:

Government should standardize and simplify applications, financial reporting formats, and

outcome reporting requirements across agencies with input from nonprofits; implement prompt

payment processing standards; create feedback mechanisms to learn how practices are working;

collect and report data on contracting practices and assess their impact on nonprofits; and work

with nonprofits to agree on mutually beneficial accountability processes. Nonprofit organizations

should help create feedback mechanisms regarding contracting processes; participate in efforts to

simplify and standardize; encourage foundations and other private funders to accept the standard

formats and standards in their reporting requirements; build the capacity to obtain and manage

government contracts, including the ability to track staff time and allocate its costs and the

capability to track outcomes; and educate the public about the importance of government grants

and contracts in providing community services (Boris et al., 2010, p. 23). Whether these reforms

are fully implemented will, of course, depend on the political and policy environment as well as

the resources that may be available to both governments and nonprofits in future years.

The current realities of government funding discussed above favor larger organizations over

smaller ones, since larger nonprofits have the diversified revenues, endowments, and

philanthropic giving to offset shortfalls or delays in government payments and a scale of

administrative operations that can absorb the complex record keeping and reporting. The

administrative requirements of managing public funds have driven increased investment in

information systems and professional managers, resources that larger organizations can more

easily obtain. These considerations also have played a role in some nonprofit mergers and may

force smaller organizations to collaborate with others, in ways discussed in Chapter 8, in order to

gain necessary scale. Performance-based contracts have increased competition among nonprofits

as well as competition between nonprofits and for-profits. That may have implications for the

culture of nonprofit organizations and the sector. For example, some researchers have found that

where government contracts are a substantial portion of a nonprofit’s revenue, the power of the

CEO may be enhanced and the role of the board diminished, with implications for governance

(Smith, 2010). Finally, becoming primarily or exclusively a government contractor reduces a

nonprofit organization’s autonomy and may lead to mission drift. As Jeremy Hall (2010)

describes, “The great paradox of grant seeking is that those organizations … with the least

resources (i.e., the greatest need) find grant funding to be very appealing, often valuing

production of something over doing nothing and thus allowing grantor priorities to overwhelm

local values and priorities. This is a significant burden to bear” (p. 5).

None of this discussion is intended to imply that nonprofit organizations should always avoid

accepting government funds, but rather that managers must be prepared for the various

contingencies that doing so may create and clearly understand the risks as well as the potential

benefits. It is also important to recognize the impact that public funding may have on nonprofit

organizations and on the nonprofit sector overall. Faced with the uncertainties and complexities

of public funding, the fact that many grants and contracts do not cover full costs, and a desire to

preserve autonomy and focus on mission, many nonprofit executives have intensified efforts to

diversify revenues by increasing philanthropic support and earned income, as discussed

in Chapters 13 and 14.

Seeking Government Support

The pursuit of support from government (or foundations) is commonly called grantwriting (e.g.,

the NIH website at grants.nih.gov/grants/grant_tips.htm), but that is not an accurate term. More

correctly, the process of pursuing a grant is grant seeking and the specific activity of preparing a

proposal is proposal writing. Grant seeking is a broader process than proposal writing, since it

includes the identification and investigation of funding opportunities as well as planning and

preparation that precedes the preparation of an application or proposal. This is analogous to

defining fundraising as something that encompasses more than the act of soliciting a gift.

Identifying Grant Opportunities

The first step in pursuing government support is to identify available programs. In some

instances, this task may be relatively easy, since the funding agency may issue a request for

proposals (RFP). The RFP invites applications and generally is quite specific about the purposes

and terms of the grants or contract that will be awarded. The RFP also usually defines the

specific format and content for a proposal and the process for submitting it; nevertheless, the

organization may be well advised to seek further information and insight though communication

with officials in the agency before preparing the written proposal (Hall, 2010, p. 53).

Unless an RFP has been issued, nonprofits can identify grant opportunities through their own

research. This is similar to engaging in prospect research with regard to philanthropic fundraising

as discussed in Chapter 11. For grants at the federal level, one resource is the Catalog of Federal

Domestic Assistance (CFDA), which provides an exhaustive list of programs and is available

online at www.cfda.gov. The CFDA lists all programs that have been authorized; the availability

of funding that has been appropriated can be found in the Federal

Funding Availability (NOFAs) are published. Another essential federal resource is Grants.gov

(www.grants.gov), a centralized resource that provides access to over 1,000 grant programs of

the federal government and through which proposals may be prepared and submitted. The

websites of individual federal agencies also include descriptions of grant opportunities. There is

no comprehensive source of grant opportunities at the state or local levels, and a search usually

requires reviewing the documents or websites of relevant agencies (Hall, 2010, p. 57). There are

also a variety of additional government and commercial databases and guides that can be useful

tools in the search for grant programs, a full catalog of which is beyond the scope of this chapter.

Evaluating Grant Opportunities

In Chapter 13, we discussed the fact that not every individual, corporation, or foundation is a

prospective donor to every organization. Similarly, not every government grant program is a

realistic opportunity for a given nonprofit organization. Hall (2010) suggests six criteria by

which organizations should evaluate grant opportunities and decide which may be appropriate to

pursue: eligibility, conditions, match requirements, allowable costs, program purpose, and the

funding amount (p. 33).

Eligibility to receive a grant under a government program may be defined by four variables: the

type of organization, the activities that the organization wishes to undertake, geographic location,

and characteristics of the organization or a geographic area. For example, some research grants

offered by National Institutes of Health and the National Science Foundation can only be

awarded to universities or research institutes, so it would be a wasted effort for any other type of

nonprofit to apply. Grant programs also may require, prohibit, or limit the expenditure funds on

certain activities, for example, construction, outreach, or research. It would be useless to consider

such a program if it simply does not include the activities for which the organization seeks

support. Some grant programs may be limited to certain geographic areas (e.g., rural or urban) or

to areas or organizations with certain characteristics, for example, communities with high rates

of poverty or organizations with demonstrable experience in treating certain diseases (Hall, 2010,

pp. 33–39). If an organization is not eligible for a grant from a particular agency or program, that

is an obvious reason to look elsewhere. But even if the nonprofit and its activities are eligible for

a grant, a careful review of grant conditions may screen out some programs from consideration.

For example, if the grant would impose administrative burdens that the organization cannot

support or matching funds that it cannot obtain, it would be inadvisable to pursue it.

Grant awards usually define what specific costs may be covered by the grant and which may not.

For example, some may permit grant funds to be used for equipment or salaries—or not. A

nonprofit must consider what expenditures it wishes to cover through grant support and

alternative sources of support to meet expenses that are excluded. However, as Hall (2010, pp.

46–47) points out, some dollars may be fungible. That means that if a grant covers some expense

that the organization is currently incurring, that may free up other money to be spent for things

that the grant cannot directly support. For example, the CEO may contribute a portion of his or

her time toward the grant-funded project, and thus a portion of the CEO’s compensation may be

eligible for reimbursement under the grant. In that circumstance, it is both ethical and legal to

reallocate that portion of the CEO’s compensation, which would have been paid in any event

from other revenues, to accomplishing something that the grant itself cannot support, for

example, a facility renovation, purchase of equipment, or the salary of a position unrelated to the

grant (pp. 46–47).

It is important to understand the purpose of the grant program and consider whether that purpose

is consistent with the organization’s mission and values. For example, if a grant program’s

purpose is to advance medical approaches to addiction treatment and the organization’s values

favor a faith-based approach to the same end, there might not be a good fit. And, finally, the

range of grants available under certain programs may exclude them from consideration by a

nonprofit organization with an identified need. It may make no sense to apply under a program

that makes average grants of $10,000 if the need is to fund a program requiring $100,000 per

year or to apply under a program that awards multimillion-dollar grants when the nonprofit is

small and does not have the capacity to manage activities at that scale (Hall, 2010, p. 48).

Preparing and Submitting an Application or Proposal

There are extensive resources available on proposal writing and on the management of contract

and grant funds, including books, manuals, and websites. The management of grants is often

complex and involves technical elements, such as performance management systems, cost

allocation, and procedures for purchasing. This book does not include a detailed discussion of

these specific topics, but suggested readings listed at the end of this chapter may be useful for

students who may wish greater depth. Chapter 13 provides a basic outline of a proposal in the

section discussing foundation support. But proposals submitted under government grant

programs are often more complex than those required by private funders, especially in their

inclusion of detailed budgets and timelines. Again, many RFPs or program guidelines will

include specific guidelines on the format and content of proposals and often will differ, so no one

template is applicable.

Preparing to submit a grant proposal does not begin with the drafting of a document. There is a

need for advance planning and discussion of important questions. For example, in some cases the

chances of obtaining a grant may be enhanced if a nonprofit works collaboratively with other

nonprofit partners. Some grant programs are designed to encourage collaboration. Collaboration

may be necessary to support the infrastructure needed to manage programs at a larger scale and

provide the administrative support needed for grant management. Collaboration also may enable

organizations to share the risk of new programs and the uncertainties that come with accepting

public funds, as discussed earlier in this chapter. But, of course, as discussed in Chapter 8,

collaboration involves additional considerations, including the organization’s autonomy and the

potential for disagreement, even conflict. There are pros and cons and larger questions that an

organization needs to consider before adopting this approach for the purpose of securing a grant

(Hall, 2010).

Whether an organization decides to proceed in collaboration with others or alone, it is often

important to secure broad support for the proposal. Government officials at any level of

government are ultimately accountable to elected officials, who are in turn accountable to their

constituents. Most will be reluctant to award funding to an organization that is viewed as risky or

disconnected from its community. In preparing to apply for a grant or contract award, some

nonprofits solicit letters of endorsement from community leaders, create an advisory board or

council to signify community engagement, or engage “symbolic partners” (Hall, 2010, p. 83) that

is, community organizations that have an interest in the program for which the grant is sought

but who will not actively participate in its activities.

Before developing a proposal, or even before beginning the grant-seeking process, a nonprofit

organization may need to address fundamental questions with regard to the possibility of

government support. In the terminology of Richard Chait, William, Ryan, and Barbara Taylor

(2005), discussed in Chapter 4 of this text, some questions may be fiduciary in nature. For

example, will the resources and attention devoted to the funded program distract from other

important activities? Do we have sufficient resources to accept the potential risks of becoming a

government contractor? Will our organizational culture permit us to accept the accountability

that comes with public funds? Others are similar to generative questions of Chait et al. (2005).

For example, is our purpose in seeking the grant primarily financial, that is, to bolster our

revenues, or to enhance our impact? And, most fundamentally, will the purpose, terms, and

conditions of the grant be consistent with our organization’s mission and values?

Nonprofits in the Policy Arena

Although some nonprofits managers may be focused on the mechanics of grant seeking and grant

management, nonprofits hoping to secure and continue government funding cannot ignore the

public policy process or the importance of maintaining relationships with individuals in

government. As Steven Smith (2010, pp. 568–569) observes, the political process can have a

significant impact not only on the availability of funds, but also on the regulations, terms, rules,

and procedures under which contracts and grants are awarded. To be successful as recipients of

government funds, nonprofits need to maintain ongoing engagement with their communities,

constituencies, and public agencies and officials. This would include, for example, agency and

program directors, state legislators, city councilpersons, and school boards through which their

programs may be funded or administered. As in any type of fundraising, relationships do matter,

and the insights and understandings that may be obtained through personal contacts and

conversations are as useful as the information that may be conveyed in documents. Larger

organizations may find that they are able to effectively advocate on their own behalf, while

smaller organizations may find it more effective to participate as members of an association

representing the interests of multiple nonprofits offering programs in a given community or

subsector (Smith, pp. 568–570). But with government funding representing a significant

component of nonprofit revenue, neither nonprofit organizations nor the sector can stand totally

apart from the larger policy arena.

Chapter Summary

Government support is a significant component of revenue for the nonprofit sector, especially for

organizations in certain subsectors, including health care, education, and human services. There

has been change over the past 30 years in the patterns and mechanisms through which

government funds are delivered, with many federal programs devolved to states and by states to

local governments. Many nonprofits receive support from all three levels of government and

need to have an understanding of complex policies and procedures.

Public funds may be awarded to nonprofit organizations directly as grants, which may permit

some flexibility to the recipient or payments under contracts. Or funds may be paid under

contracts, in exchange for the delivery of specific goods and services and with defined

performance requirements. The distinction between a grant and a contract are defined in federal

law and the government applies specific questions in deciding which route to follow to address a

particular need or project. Some government benefits are provided to individuals in the form of

vouchers or under voucher-type programs; the funds come to the nonprofit organization in the

form of payments for services delivered to the individual. The government nevertheless will

impose requirements on nonprofit or for-profit organizations that serve clients receiving public

support. There are various types of contracts that will be used by the federal government,

depending on the circumstances under which the award is made. The types involve varying

levels of government oversight and risk for the contractor.

Nonprofits benefit from public funding, which they may not be able to obtain at comparable

levels from other sources. Government benefits from the impact of services provided by

nonprofits, which it may not be able to provide effectively or efficiently on its own. Nonprofits

may have a competitive advantage over for-profit firms in competing for government contracts,

since they may be viewed by government officials as more worthy of trust. However, the receipt

of government support may present challenges to nonprofits, and some research has found that

these challenges are common. They may include matching requirements, delayed payments,

complex administration and reporting, changed conditions, and performance requirements that

may lead to termination of support. Government funding also may affect the culture and the

distribution of power within a nonprofit organization. Nonprofits that seek and accept public

funds need to prepare to address any such challenges that may occur.

The administrative requirements that come with public funds favor larger over smaller

organizations and encourage collaborations or mergers among organizations, intended to gain the

scale and depth of management capacity that is needed. Experts have offered recommendations

to government and nonprofits on how to improve their relationships, including the simplification

and standardization of processes and requirements and increased nonprofit capacity to manage

contracts and grants.

Grant opportunities may be identified through various resources, including the Catalog of

Federal Domestic Assistance (CFDA), the Federal Register, the website Grant.gov, or through

individual agencies of the federal, state, and local governments. Nonprofits should evaluate grant

opportunities and decide which may be appropriate to pursue based on six criteria: eligibility,

conditions, match requirements, allowable costs, program purpose, and the funding amount.

The process of pursuing government support is correctly called grant seeking. A part of that

process usually involves proposal writing. Proposal writing and grant management are not topics

covered in detail in this text, but many resources are available—as books, on websites, and in

other media. Writing a proposal is not the first step in grant seeking. Rather, nonprofit

organizations need to engage in planning, address the advantages and disadvantages of

collaboration with other organizations, consider ways of developing and demonstrating broad

community support, and address fundamental questions regarding the purpose of seeking grant

support and the consistency of grants or contracts with the organization’s mission and values.

KEY TERMS AND CONCEPTS

 allowable costs

 block grants

 Catalog of Federal Domestic Assistance (CFDA)

 conditions (of a grant)

 contracts

 cost-reimbursement

 contract

 eligibility (for a grant)

 Federal Register

 firm-fixed-price contract

 fungible

 grant

 grant seeking

 incentive contract

 indefinite-delivery contract

 indirect costs

 labor-hour contract

 matching funds (requirement)

 proposal writing

 public–private partnership

 request for proposals (RFP)

 time and materials contract

 vouchers

 voucher-type programs

CASE 15.1 SEED Foundation

Founded in 1997 in Washington, DC, by social entrepreneurs Rajiv Vinnakota and Eric Adler, the SEED Foundation

operates urban, college-preparatory, public boarding schools in Washington, DC, Maryland, and South Florida, with

plans to expand nationwide. SEED schools serve young people from low-income backgrounds with a rigorous

academic program, provided in a 24-hour nurturing environment. SEED’s program is comprehensive, including life

skills, health and medical and social components. As of 2011, 91 percent of SEED students who entered the ninth

grade graduated from high school, and 94 percent of graduates were accepted in college (SEED Foundation, 2014a,

2014b).

A 2012 study by economists at Harvard and Stanford found that SEED’s impact on student achievement was

significant and, indeed, greater than that of the average charter school (Curto & Fryer, 2012).

SEED has gained national attention. In 2009, President Obama visited the Washington, DC, SEED school to sign the

Edward M. Kennedy Serve America Act. In 2010, SEED was featured on CBS’s 60 Minutes and in the documentary

film Waiting for Superman(SEED Foundation, 2014a).

SEED’s funding model is a mix of private and government funds. The costs of developing a school’s facilities and

its start-up costs are provided by philanthropists. Once opened, the school’s operating costs are covered by public

funds (www.seedfoundation.com). But the patterns and mechanisms of public funding vary.

In opening the Washington, DC, school in 1998, SEED lobbied the U.S. Congress and the District of Columbia City

Council to amend the education budget to fund a boarding school and then obtained a charter from the District of

Columbia Public Charter School Board. Charter schools are public schools, but they are given more autonomy than

traditional public schools, in exchange for their agreement to produce specific results, as identified in their charters.

Charter schools receive payment on a per-pupil basis, generally equivalent to the per-pupil expenditure for

traditional public schools (www.dcpubliccharter.com). The Washington SEED school receives operating funds

equivalent to other charter schools, but special legislation was needed in order to add extra payments to cover the

boarding component (Bruce, 2010).

SEED’s approach in Maryland was somewhat different. Rather than operating as a charter school, SEED’s Maryland

program is funded under an act of the Maryland legislature, H.B. 1432, passed and signed by the Governor in 2006

(SEED Foundation, 2014a). Students come from all parts of the state of Maryland; the state provides the school with

a payment equivalent to 85 percent of the per-pupil amount that would have been spent if the student had remained

in his or her home school district, plus additional payments for transportation and school administration

(McCausland, 2008).

In 2011, the SEED Foundation was awarded a $3.5 million grant from the Edna McConnell Clark Foundation and

the federal government’s Social Innovation Fund, to help expand its programs nationwide (SEED Foundation,

2014a). The Social Innovation Fund was created in 2009 and provides federal grants to funding intermediaries, such

as the Clark Foundation, which then select high-impact organizations to receive support. The grants require that the

intermediaries and the subgrantees match federal money with other funds raised from private sources (Corporation

for National and Community Service, 2014a).

SEED’s model for funding of new schools may vary according to the environment in each state. For example, in

2012, Ohio passed legislation for a SEED school in Cincinnati, with the possibility of additional schools elsewhere

in Ohio. The Cincinnati school’s development would be supported by a philanthropist, but its operation would be

supported by public money. Unlike the schools in Washington, DC, and Maryland, the Cincinnati school would be

operated in partnership with the local Cincinnati public school system. It would be neither a traditional public school

nor a charter school, but rather a “brand new model of education” (NPR State Impact, 2012). In early 2012, SEED

obtained approval for a charter school from the Miami-Dade public school board in Florida. The SEED School of

Miami opened in 2014 on the campus of Florida Memorial University (www.seedfoundation.com/index.php/seed-

schools/south-florida).

Questions Related to Case 15.1

1. Based on the information provided in the case of the SEED Foundation, are public funds contractual payments,

grants, voucher-type benefits, or some combination?

2. Do the SEED schools meet the definition of a public-private partnership, as discussed in Chapter 8? Why or why

not?

QUESTIONS FOR DISCUSSION

1. If you were a government official, would you prefer to contract with a small community-

based non-profit organization or with a for-profit company that might have greater

resources? What could be the advantages and disadvantages of each?

2. If you were a nonprofit CEO, how would you summarize the advantages and

disadvantages of the three primary sources of nonprofit revenue: philanthropy, earned

income, and government?

SUGGESTIONS FOR FURTHER READING

Books/Reports

Boris, E. T, deLeon, E., Roeger, K. L., & Nikolova, M. (2010). Human service nonprofits and

government collaboration: Findings from the 2010 national survey of nonprofit government

contracting and grants. Washington, DC: Urban Institute. Retrieved

from http://www.urban.org/uploadedpdf/412228-nonprofit-government-contracting.pdf

Boris, E. T., & Steuerle, C. E. (Eds.). (2006). Nonprofit and government: Collaboration and

conflict. Washington, DC: Urban Institute.

O’Neal-McElrath, T. (2013). Winning grants step by step (4th ed.). San Francisco, CA: Jossey-

Bass.

Hall, J. L. (2010). Grant management: Funding for public and nonprofit programs. Sudbury,

MA: Jones & Bartlett.

Websites

Catalog of Federal Domestic Assistance: https://www.cfda.gov/

Grants.gov: http://www.grants.gov

Companion Website

Visit study.sagepub.com/worth4e for access to certain full-text SAGE journal articles and links

to relevant video and multimedia content.

Running head: DISCUSSION POST 1

Discussion post

Name

Course

Institution

Professor

Date

DISCUSSION POST 2

Discussion post

Concepts

The American Red Cross is a nonprofit organization which assists in handling the

affected people during disasters such as war and hunger. The organization has succeeded in its

operations in the past through proper management and dedicated employees who provide their

labor. The firm has extended its operations to meet the demands of the people in the society.

However, it should also consider the concepts of accounting, bookkeeping, and financial

management to ensure that it has a smooth flow of operations. These concepts would ensure that

there is proper management of funds and resources that will thus provide that the corporation

assists the majority of the affected (Chapter 12). Through proper management and keeping

records for future reference, it will become possible to make the right decisions which will

govern the operations of the corporation. Therefore, there is the need to consider all the concepts

to ensure that the company can achieve its set goals and objectives and perform as per the

expectations of the people in the society.

Definition of the concepts

Bookkeeping refers to the method through which recording of all business transactions

take place. In the case of the Red Cross Society, there is the need to record the different sources

of funds and how the funds get used to meet some of the needs of the people affected by natural

disasters or others. This recording makes it easy to have a future reference, and it also ensures

that there is transparency in the corporation and its activities.

Accounting, however, refers to the adherence to the rules of financial transactions and

ensuring that there are recording and reporting of the financial activities. Accounting also

DISCUSSION POST 3

encompasses the creation of financial statements that explain the position of the company in the

industry of its operations. In the case of the nonprofit organization, the accounting process aids

in ensuring that no funds go unaccounted for since this would make the management

irresponsible in operations. The American Red Cross depends on the donations by people in the

society, the government, and private institutions. As a result, there is the need to account for all

the money and ensure that it is directed towards the right activities.

Financial management, on the other hand, is broader than accounting but entails the use

of the financial statement and bookkeeping records. Financial management thus deals with

creation and analysis of different financial ratios as a way of understanding the business

operations and their impact on the company as a whole.

Benefits of the concepts

The American Red Cross would benefit from the application of the above concepts by

enhancing transparency in operations and management of all its funds and resources. This would

also ensure that the firm can make the right decisions that will have a long-term financial impact

on its operations. Therefore, the concepts will provide a platform through which operations of

the firm will yield success in the long term.

Reflection of God's purpose

According to the Christian beliefs, there is the need for transparency in one's life, and this

makes it easy for people to understand and offer assistance in case of need. In this case, the

organization will only receive funding from people and well-wishers by showing that it has

effectively managed what it already has in helping those in need in the society.

DISCUSSION POST 4

Discussion Post BUSI 409 Non Profit Management hw.pdf

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