Nonprofits are unique in their mandate to pursue their mission statements without prioritizing profitability. However, some nonprofits end up making much more money than they anticipated. Whether through successful fundraising campaigns or an unexpected surge in demand for their services, nonprofits finding themselves in a surplus often face an array of complex challenges. In this blog, we’ll explore the implications of surplus income for nonprofits, and how they can navigate this territory with grace.
Implications for Taxation and Legal Compliance
The IRS applies strict regulations to tax-exempt organizations. If nonprofits make an income not directly tied to their mission statement, it can lead to questioning and scrutiny from regulatory agencies. Nonprofits must pay taxes on unrelated business income, so if they earn profits on the side, they will be subject to a tax. This becomes even more complicated if nonprofits operate in multiple states, as they’ll need to be compliant with all the laws that apply. Failing to comply can lead to reputational damage and legal consequences.
Issues with Donor Expectations
Nonprofits operate on the trust of their donors and supporters. When nonprofits make too much money, it can damage relations with supporters who may feel as though their donations are being misused or ineffectively allocated. Donors may also question whether their charity of choice needs additional funds at all if they’ve already exceeded their revenue targets. To overcome this, nonprofits must communicate openly and transparently with their stakeholders to ensure they understand how any extra funds will be used to further their mission statement.
Pressure to Increase the Scope of Services
When nonprofits succeed, there is a natural urge to expand their impact. However, expanding into new areas of service can be risky, as it may dilute the impact of what already works. Moreover, branching out can lead to increased costs and greater need for infrastructure. Nonprofits must be intentional in their efforts to scale their impact while ensuring they never compromise their core competencies.
Ensuring Long-Term Sustainability
Nonprofits must work to ensure their financial security and sustainability for the long-term. Unexpected surpluses can be tempting, but it’s important that nonprofits are cautious in their approach to spending or allocating it. Investing it in endowments or reserves, or using it to further research and development, can reduce the risks associated with an overreliance on donations. Nonprofits should work to create reserves and endowments to help them weather financial storms that may arise.
Communicating Outcomes and Impact
Nonprofit success depends on their ability to deliver on their mission statements. When nonprofits succeed beyond their targets, the pressure to demonstrate their impact grows stronger. Donors and stakeholders expect to see results in the form of meaningful outcomes such as measurable impact, relationships built or lives changed. This means that nonprofits must remain accountable and track their impact metrics in order to communicate their success effectively.
Nonprofits are unique institutions that must prioritize their missions over profitability. But this mandate does not mean that they shouldn’t strive for financial success. Excess revenue can create challenges, but nonprofits that are mindful in their approach can ultimately leverage the opportunity to make even more impact than was initially possible. By fostering transparency, being cautious in expansion, building ahead, and communicating effectively, nonprofits can succeed even when they make too much money.