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Academic insight: Professor Elizabeth Searing
What are the challenges of nonprofit finance? Elizabeth Searing gives an academic insight.
The benefit theory of nonprofit finance means that there is a connection between the type and characteristics of the good or service that you’re offering and the ideal type of funding that would go into providing that service. And so when I talk about the characteristics of the good or service, I primarily mean whether it’s rival and whether it’s excludable. So, excludable in that can I keep other people from consuming whatever this good is. And rival in terms of if I consume it, is it going to disappear, or can everyone have some. So, for example, something that is both rival and excludable is a cupcake. So, there is one cupcake.
Then I can keep everyone else from eating it, and once I eat it, it’s totally gone. But something that is neither rival nor excludable would be sunshine. It comes down, everyone can have it, and it’s really tough to keep someone from getting sunshine. It’s possible, but generally, it’s very, very difficult. And so using these to describe your good or service helps lead you toward the right type of funding. So, for example, if you are offering a good or service that is available to absolutely everyone, and you can’t keep anyone from consuming it, then it’s going to be difficult to offer it on the private market.
Things that are easy to get earned revenues for are things that are rival and excludable. You can sell these pieces of service, and so a lot of what we try and do as nonprofits when we try and venture into earned revenue, is we try and sell pieces of things. But regardless of how much you might want to turn a good or service you have into something that you can take to the private market, sometimes you’re going to be best-fitted to a source of funding that is not unearned revenue.
So, for example, if you are providing social safety net services, and you’re unable to turn anyone away, because that’s not part of your mission, then it’s going to be very difficult to charge individual people, individual consumers for that service. And so, this is I think especially helpful when we start thinking about the trend, especially in the US, to push nonprofits into earned revenues. A lot of nonprofits will come to me and say we don’t want to be dependent on, for example, government grants.
However, sometimes government grants are the ideal fit for what it is that you do, and you shouldn’t try and warp what it is that you– what it is that you want to provide to your service recipients in order to meet a certain type of funding.
Elizabeth Searing is an assistant professor at the State University of New York at Albany. In this video excerpt, Searing explains the benefit theory of nonprofit finance and the relation between the type of the good or service you’re offering and the ideal type of funding it. For Searing there is no ideal mix of financial sources because the financial portfolio is always going to be dependent on the types of services one provides and the ecosystem one is situated in. But it is favourable not to concentrate on one particular source. Earned revenues are important if, for instance, a government funding is missed. These revenues are also less restrictive: When selling t-shirts an organization is free to use that money for any purpose. For Searing it is always a good advice to have this option in the income portfolio compared to money with specific usage restrictions. Thus, it is always a kind of ‘individual diet’ which is going to vary depending on each organization.When it comes to financing in nonprofit and for-profit organizations, there are four major differences, according to Searing:
- First of all, for nonprofit organizations, there is a huge variety of different types of financial sources, eg government grants, foundation money, individual donations, or even earned revenues – for example when an organization is selling t-shirts. Whereas the financing in for-profit organizations is more straightforward, dependent on the market and private investment.
- Secondly, to handle markets and private investors is a lot easier for for-profits. An example Searing provides is: someone is buying a cheeseburger for $3 US in McDonalds. In a nonprofit finance, this person is likely to add: ‘You can only use this money to buy meat, but not for the salaries of the managers and any other administrative expenses. This kind of donor stipulation is very common in nonprofits, but not in for-profits.
- When it comes to nonprofit organizations, in many countries – especially Germany, Italy, England, and the US – there is a certain ‘asset lock’. It is not possible to tempt investors by offering them ownerships of parts of the company because they are publicly owned. The fact that there are no technical owners makes it more difficult to raise capital for nonprofit compared to for-profit organization.
- Last but not least, the incentives when trying to convince someone to invest in a nonprofit or a for-profit organization are different. For nonprofits it is more difficult, since they have to pull on both, the business and the charity side. And the task of explaining that money is needed to start off is not the easiest for a nonprofit, whereas for the for-profit it is only the business side, meaning profit maximization, they can concentrate on.
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