We Earn our Grants, But That’s Not the Point
Once upon a time, non-profit organizations had two different kinds of revenue: “earned” and “unearned”. Earned revenue was the money from ticket sales, admissions, and other services. Unearned revenue came from grants and contributions.
At some point, it occurred to someone that calling a major source of income “unearned” made us all sound like a pretty lazy bunch. After all, just because a foundation is paying you to carry out a particular activity doesn’t mean you’re not working just as hard. So the term fell out of fashion and was replaced by “contributed”. Non-profits today still have two different kinds of revenue, but now they’re called “earned” and “contributed”.
This linguistic slight of hand was a step in the right direction, but I’m not convinced it really touched on the underlying issue. First, since one side of the new dichotomy is still “earned”, there remains an unspoken implication that contributed revenue is somehow less honestly procured. More importantly, though, we’re framing the issue through the wrong lens altogether.
The real distinction that we’re trying to make with this terminology is about whether or not the revenue comes from the actual consumers of the service in question. Earned revenue comes from the people our programs are ultimately serving, while contributed revenue comes from interested third-parties (i.e., donors or funders).
So what’s the point? Isn’t this just a trivial reframing? I don’t think it is, because once you’ve started dividing your revenue in this way, it’s hard to avoid some soul searching on the most important question that non-profits rarely ask themselves: who is our customer? I’ve written about this in the past so I won’t rehash all of that here. But the main point is that the answer to this question is arguably the most central determining factor in an organization’s identity, and yet most of us in the non-profit sector are uncomfortable even uttering the word “customer”.
We need new language that describes our sources of revenue from this perspective. “Direct Revenue” and “Indirect Revenue” is one possibility, but I’m sure there are others. If you have ideas, post them in the comments.
Tags: earned revenue, non-profit
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I’ve been thinking about something related lately, which is that at least from an economic standpoint, the difference between donors and customers is overblown. You can think of it as being in the business of selling gifts. Whereas a ticket-buyer is purchasing the opportunity to see your show, a donor purchases the opportunity for someone else to see your show. A larger donor, then, is simply the buyer of a larger gift; one that allows many people to see the show for less than would have been possible otherwise, and in some cases allows the show to happen at all, which is a gift to all of the artists involved. I am thinking about this in the context of a word people in business school like to throw around a lot, which is “sustainability.” There’s an implicit assumption there that an organization isn’t sustainable if its business model relies to any degree on contributed income. That’s an argument I often hear against turning newspapers nonprofit, for example. Particularly for something like the arts, I think that the difference between donor and customer is really just a form of glorified price discrimination — both are more or less paying for the same thing, but some pay more because they can. That’s not any more or less sustainable than any other model. What makes it sustainable is the diversity of your funding streams and the level of demand you can demonstrate for what you do (measured by breadth or intensity or both) relative to the cost. That’s not any less true for a for-profit than it is for a nonprofit.
But back to what you were saying: how would you categorize unrelated business income, or fees for services performed (like rental of your space to another nonprofit)? That would go in the “earned” category, but it’s not coming from the people being ultimately served as defined by the mission.
Donors support your mission. If you don’t fulfill your goals and objectives, you have not earned their donation. We run a community radio station that is almost entirely funded by listener contributions, not large donors. We have to earn that money every year by providing the sort of programming they want to hear. That keeps us very focused on our mission. Working in the non-profit section in the U.K. we had government grants which required very stringent reporting of results. The money is given to achieve an objective. That objective must be measurable. If you don’t measure up, you don’t earn the money - simple as that.
With visual art, the donor believes that the artist contributes to the community in some way and wants to support that artist so that they can create. Patronage has always been a part of art and it has always had the objective of freeing the artist from other concerns so that they can focus on what they are uniquely able to do. It is different than say supporting a craft movement because the artists may create functional objects that can be sold. I agree with the comment above in that the generous patron allows the widest possible audience to view the art. The responsibility of the non profit is to make sure that the artist can produce work and that the work gets exposed to the widest possible audience. That is the mission, surely.
@Ian
Donors *are* customers - no question about it. My point is simply that any business will naturally focus its attention on the people who give it money. This is partly an argument to focus on direct/earned revenue when possible, but also a caution to those large grant-funded institutions who sometimes forget who they’re there to serve.
I agree with you that having diverse revenue streams improves your sustainability. I’ve seen too many non-profits go under because they were reliant on 1 or 2 major funders whose support disappeared. On the other hand, a well funded endowment might be the best tool for sustainability the world has ever known!
As for your final question… I might break these up into two additional categories: Ancillary Income and Unrelated Business Income. Renting your space to another similar non-profit is ancillary. Renting it to Coca Cola so they can shoot a commercial is unrelated. This is consistent with the IRS treatment as well, since the latter would be considered taxable as UBTI.
@Tim
Community radio is a great example of strong alignment between an organization’s “constituents” and its “customers”. Perhaps to a greater degree than any other kind of non-profit, your donors are also the people you serve. I could be comfortable classifying that revenue as “direct” within this taxonomy.
The “Indirect” and “Direct” classifications might become confusing for people in the performing arts where those monikers are used for the expense side of things, direct expenses being things such as project t materials and indirect expenses being things such as maintenance space costs and other expense that spread around
[...] love of earned revenue for non-profit organizations is hardly a secret. Mostly I’ve made the argument that earned revenue aligns your mission with your [...]