Navigating Evolving Business Models in the Nonprofit Sector
In a perfect world, all corporations are driven by their missions. More often, when we think of mission-driven organizations, we think of the nonprofit sector. All corporations face challenges and the nonprofit sector presents a host of challenges that are far different from for-profit companies.
Just as not all corporations within the same industry have the same business model, nonprofit organizations all need to form the best business model that works for them. For example, a nonprofit organization that is primarily a direct service provider needs a much different business model than a nonprofit that exists primarily to advocate for a cause.
The right business model can help nonprofit organizations to successfully meet and resolve the challenges they face. Nonprofit organizations grow and change over time. When an organization changes drastically, it calls for also changing the business model accordingly. It’s the board’s responsibility to recognize when it’s time to make a change in the business model.
For many nonprofit boards, their first reaction to a reduction in operating funds is to reduce overhead costs. In many cases, boards have already reduced overhead costs beyond what is reasonable. This problem often creates tension among board directors. When the current model no longer works, boards need to look at past models and work together to create a new model that responds to their current needs.
Business Models and Nonprofits
How do you define whether your nonprofit is successful? Success for nonprofits is often defined by the level of impact they have on their communities. At the same time, nonprofit organizations are business enterprises and they’re built on some type of business model that helps them succeed.
The recent economic downturn created many new financial challenges for nonprofits. Many of them were ill-prepared for fluctuations in income. Financial instability was a wake-up call for many nonprofits. It was a strong signal for nonprofit leaders to assess the effectiveness of their particular business structure. As much as it was unexpected, financial challenges gave nonprofit board directors an opportunity to prepare a new business model that would better adapt to future economic volatility.
Under any circumstances, board directors shouldn’t consider their business models to be static. Just because their model doesn’t seem to be working doesn’t mean that it’s broken. It may just mean that it’s time to develop a new model that’s better designed to meet the nonprofit’s current needs.
In preparing for a new model, board directors need to be able to understand the current model that they’re working with. The first step is to diagnose any critical weaknesses of the nonprofit. The next steps are to forecast and plan for a structure that will address the weaknesses that will also be effective for the short-term and the long-term and implement those changes.
Evaluating Your Current Business Model
Business models for nonprofit organizations consist of four basic core components. These core components join to form the business model that creates value for the community and sustains the entity as a business. The four core components of a business model are:
- Program costs
- Infrastructure
- Revenue mix
- Capital structure
Each component is impacted by the weaknesses of the other three. In analyzing their current business models, nonprofit boards will need to analyze the components of their current business models and diagnose the critical weaknesses. The assessment requires evaluating external factors like economics, as well as internal factors like past decisions and leadership actions. Be aware that forecasting and planning for changes in the model can lead to significant changes that affect core programs and activities.
Transitioning to a New Nonprofit Business Model
To break things down a bit further, boards will need to analyze the current condition of the four financial components of the business model before they can complete the process of developing a forecast and plan to implement the changes needed for the next stage.
Infrastructure
The first thought that nonprofits have when funds are quickly being depleted is to cut administration costs to preserve programs and services. That’s not necessarily the best approach. Regardless of the economic status of a nonprofit, they are always in need of stable, effective leadership. Boards should first consider other ways that they can change expenses while maintaining a vital infrastructure.
Another not so obvious thing to consider is how they can restructure the organization. Is it possible to change staff roles and responsibilities to offset the lack of financial resources? In many cases it is.
Capital Structure
Nonprofits that have been in existence for any length of time will have generated some amount of capital. Although, they may not have access to their capital. Much of the capital could be tied up in buildings or other non-liquid capital which will limit cashflow. Having liquid cash to invest in a new fundraising plan, program development, branding, and marketing will help nonprofits grow under a new model.
Revenue Mix
Your board should have a good idea of where existing funds are coming from. They may come from individual donors, membership fees, government contracts, foundation grants, or other places. As part of your new business model, gear your systems and relationships to those sources. The economy can have a huge impact on the volatility of public funding. By taking stock of your dominant funding sources, boards can more easily assess the stability of that funding. It’s important to ask the question of how you can develop other funding sources within your existing capacity. If not, the board will need to collaborate on how they can best develop the necessary capacity to grow and thrive.
Cost of Effective Programs
Every program that nonprofits offer comes with some form of direct costs. The board will need to carefully consider the allocations for occupancy, technology, office expenses, and communications. For example, a board portal is an expense, but it’s one that ultimately saves the board because of its efficiency. Be sure to consider the difference between cost and price. The price is subsidized by the organization using contributions, funds, and other sources of income.
Finally, governance models for nonprofits do exist and they can be used as templates for a new model. Boards need to have flexible thinking to be able to change the model up as necessary. After implementing new models, it’s also important to evaluate how well the new model is working and adjust it as necessary.
