Earned Income

by Tony Ramsden, MBA ’70

The term “earned income” covers a multitude of possibilities. Put broadly, it indicates almost any income which a nonprofit receives from sources other than contributions and grants.

It is most commonly income from services provided or products sold. Many nonprofits (performing arts organizations, for example) generate substantial earned income, but ACT is often asked to help a nonprofit with little or no earned income evaluate ways to increase the amount of earned income it receives, in order to reduce its dependence on contributions and grants.

Project Definition

ACT will help the nonprofit evaluate the feasibility of earned income as a significant, new revenue source. We will identify the size and scope of the potential market, consider the nonprofit’s competitive strengths and weaknesses, identify organizational and staffing issues, and develop a financial model. A typical goal is to provide the board with a detailed analysis that is a basis for a go/no-go decision. Often ACT’s recommendation is “no-go” because the potential revenue is too low, the risks are too high, or there will be an unacceptable impact on the mission of the nonprofit.

Typical questions to be answered during an earned income project:

• How can the nonprofit best position itself to generate earned-income while still holding true to its values and mission?

• What strategies would the nonprofit adopt in order to do so?

• What is the size and scope of the marketplace? What is the potential revenue the nonprofit could generate, and over what period of time?

• What staffing and other organizational capacity considerations would the nonprofit need to consider in order to be a viable contender?

In some cases it may be appropriate to define an ongoing framework and process for the nonprofit’s use in identifying and evaluating future earned-income opportunities after the ACT project is complete. As part of such a process, the two-by-two matrix below is an example of an approach for categorizing earned income opportunities.

Project Process

The process typically includes the following seven steps:

1. Meet with the board of directors and the executive director to kick off the project and understand the nonprofit’s objectives as regards earned income opportunities and any concerns it has about earning income. What types of opportunities does it wish to investigate? What is the organization’s goal in terms of income amounts and timing? Are there particular strengths the organization has which would help it to exploit these opportunities? Are there constraints on its capability or capacity to invest in and pursue earned income opportunities and, if so, are there ways to overcome these? Are there any “showstoppers” that make the project not worth pursuing at the current time?

2. Identify all possible earned-income opportunities that initially appear to be possible, with an understanding that the list may be prioritized or shortened later in the project. Note any concerns about the opportunities, including potential conflicts with the nonprofit’s mission. There are several approaches that may be used individually or combined for this step:

• The nonprofit may have identified one or more possible earned income opportunities that it wants the project to focus on.

• A staff brainstorming session can be an effective way to generate ideas about opportunities, while at the same time building staff involvement and buy-in, and surfacing staff concerns that must be addressed during the project.

• Interviewing key staff members, board members and other stakeholders may help to zero in on opportunities to evaluate.

• If the organization does not have specific opportunities in mind but wants to investigate a particular market for opportunities it might pursue, analyze the market and identify the types opportunities that might be feasible.

3. Prepare a first draft of the possible types of earned income that the nonprofit could generate, with initial assumptions about each type, priorities if appropriate, and policy recommendations for addressing any conflicts with the mission.

4. Investigate possible earned-income programs. This could include:

• A search for nonprofit organizations similar to the client that have implemented (or attempted to implement) earned-income programs, possibly including organizations outside of the Bay Area

• A study of the possible markets

• A survey of the competitive environment (including both potential partners and competitors).Identification of the nonprofit’s competitive strengths and weaknesses, organizational resources, capacity for generating earned income, and potential impact on the organization’s nonprofit mission-driven projects.

5. Conduct a midcourse review with the client. The initial study may have revealed that there is no attractive and appropriate opportunity for an earned-income program, in which case the project should be terminated. The review may also serve to redirect or focus the team’s efforts.

6. Prepare a first draft of a plan for the nonprofit to enter the earned-income marketplace, supported by a rough staffing plan and financial model covering the first few years, and make a preliminary go/no-go recommendation. Alternatively, identify a couple of different earned-income options, with less detail (e.g., no staffing plan or financial model), but with pros and cons.

7. Refine and add details to the most promising earned-income program, including a financial model for the first years. Review this in detail with the nonprofit’s management, board, and key stakeholders, incorporating feedback into a final plan.

Likely Deliverables

• Possible earned-income opportunities, with evaluation of fit/conflict with nonprofit’s mission

• Market and competitive analysis, including partnership opportunities if appropriate

• Assessment of the organization’s capacity for success in generating earned income

• Financial model for projection and analysis of revenue and profit/loss potential

• Evaluation of alternative earned-income scenarios, with go/no-go recommendations

• Documented process for evaluating other earned-income opportunities in the future (optional)

• Final presentation to the board of directors

Helpful Hints

• During any kick-off meeting, participants should share experiences (both positive and negative) about previous earned-income efforts. This allows biases to be aired early and prevents past pitfalls from recurring.

• In some cases, an earned-income evaluation project that results in a “go” decision may require a second project (with or without ACT’s involvement) to develop a more detailed business plan for the chosen option.