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Earned Income as a Sustainability Strategy - Part 2: 3 Things to Know Before Spending a Dime


The following article is a continuation from last week's Part 1 on this topic. If you missed it, you can read that article here.
 
Earned income is not risk-free.
 
Earned income efforts require a lot of investment up front, whether that is in equipment purchases, building rental, legal and accounting expertise, printing and graphic design, or other items needed to get the initiative off the ground. Be prepared to spend some money.

 

Aside from the upfront investment, there is the risk of failure and success. If the effort does not take off, you've lost the initial investment and any other funds in the process. But, this could also lead to decreased morale among staff and board as well as potentially harm your organization's reputation.
 
There are also risks of being successful. If not related in some way to your mission, you could experience mission drift, which may hurt your 501(c)3 status and/or reputation. And you will receive scrutiny from local business competitors. They will certainly want to know that you are pricing fairly and are not using the potential labor you have to undercut the market.
 
Pay taxes.
 
Some funders will also look at earned income efforts against need, thinking that your organization no longer needs their funds. Be accepting of some of this and be ready to communicate to funders that earned income is strictly expansion of the mission and their continued support is needed. And finally, depending on the type of product or service you are offering, you will pay Unrelated Business Income Tax (UBIT). But is it more advantageous to pay UBIT on money earned rather than not having that income at all?
 
Get a lawyer.
 
More than likely your accounting and finance team is overworked, and most organizations do not have an in-house lawyer. Earned income is typically uncharted territory for nonprofit professionals so take some of the financial and legal issue out of the equation by hiring an attorney. If you can find legal and finance experts within the nonprofit and/or business sectors, even better, as they will understand the issues your organization faces.
 
Granted, some of these things are scary but so is starting a business venture. Don't let this completely keep you from exploring the idea. Once you understand these issues, you will have a better grasp on how to proceed.
 
Do research.
 
Beyond the initial acceptance of looking at earned income, your organization will need to spend some quality time and work toward researching what is best for your organization. The financial investment for this initial exploration may be little to no cost. But certainly, do not divert resources from current fundraising and grant efforts that are successful for your organization. If you do choose to pursue earned income, it is to complement grant and fundraising efforts, not completely replace them.
 
I recommend your organization consider a small task force that includes an executive staff member, board member, finance department representative and your biggest earned income cheerleader. This group can be tasked with initial feasibility efforts that look at how earned income works into the organization's strategic and operational work, what types of products or services could be sold by the group, financial needs and a full marketing feasibility study. Based on all those factors, your organization should be set to pursue an earned income opportunity.

 

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