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December 12, 2010
Giving nonprofits a business edge

by Steve Garmhausen

George McDonald prides himself on running his human-services nonprofit, The Doe Fund Inc., like a business.

He started his charity by organizing the homeless people who were living in Grand Central Terminal, putting them to work and paying them for it, as a way to rehabilitate them and get them into homes and lasting jobs.

By training people to work within its revenue-generating units—as street cleaners, caterers and exterminators, for example—the 25-year-old Doe Fund has helped transition 5,000 homeless or formerly incarcerated people into permanent employment. At the same time, the revenue earned from those operations covers 10% of the organization's $50 million annual budget.

“We're a not-for-profit business,” says Mr. McDonald. “But that doesn't mean we're not a business.”

Other nonprofits based in the city agree that operating a revenue-generating business has helped them fulfill their missions. That's why many local charities are upset over a recent study from Pace University, which asserts that profit-making activities within nonprofits may actually be draining money from the very programs they are meant to fund.

The analysis of tax returns from more than 100 Manhattan-based human-services nonprofits suggests that some may be using donor funds to subsidize their unsuccessful side businesses. The study's author, Rebecca Tekula, executive director of the Wilson Center for Social Entrepreneurship at Pace, says her finding applies specifically to nonprofits that run businesses unrelated to their core mission. “[Charities] should think more carefully about whether this really works for the organization,” Ms. Tekula says.


But some of the nonprofits that were included in the study say its analysis of their tax returns was superficial. They also complain it could give the impression that all revenue-generating business ventures are suspect, even those related to a nonprofit's core mission.

Even worse, some experts worry, the potentially damaging report could hurt donations during the most important fundraising time of the year. “It comes in the fourth quarter, as organizations are racing to get year-end appeals out,” says Ruth McCambridge, editor of The Nonprofit Quarterly.

Far from being a funding drain, businesses within charities are often the engine of their missions. The visibility of the Doe Fund's street sanitation operation, which counts 11 business improvement districts in the city as clients, drives much of the nonprofit's fundraising and job-placement success.


Another nonprofit, God's Love We Deliver, runs a catalog business to raise money for its mission of helping people living with HIV/AIDS. The nonprofit earns an annual surplus of about $35,000 through catalog sales of everything from Chuck's Famous Brownies—baked in the organization's SoHo kitchen—to wine glasses. That money is plowed into core services such as nutrition education and home delivery of meals, says Chief Executive Karen Pearl.

But Ms. Pearl acknowledges that the catalog business was a money loser as recently as 2006. Since then, the organization has scrapped the paper catalog and put the business online.

“We evaluate very carefully every dollar we raise from our donors,” says Ms. Pearl. “We're all about ensuring those dollars are well-spent.”

The catalog's money-losing past provides a clue as to how tricky it can be for nonprofits to run side businesses. Indeed, managing businesses—especially those unrelated to core mission—can drain staffing resources at a nonprofit, says Ms. McCambridge, adding that Ms. Tekula's study raises important questions.

Many nonprofits do keep a close eye on their revenue-generating businesses. Last year, the American Foundation for the Blind stopped selling its audio books, a side business that was losing $500,000 a year, according to Carl Augusto, chief executive of the agency.

Mr. Augusto cautions that revenue-generating businesses can cost an organization more than just money. “Whenever you have a 'side business,' it can take the CEO's and the staff's attention,” he says. “You've got to be careful.”

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