Join The NonProfit Times: or Become a member

Subscribe: Print Publication or Newsletter

Stay connected.
Stay informed.

Your Nonprofit Business Model: Is It Really That Healthy?

By Thomas McLaughlin - December 19, 2011

It is difficult to talk about business models without sounding like a candidate for Wonk of the Year, but streetsmart managers know that the concept is at the heart of successful management. Strong business models bring programmatic and financial success, while weak ones bring irrelevance and even ruin.

The idea is not commonly accepted in the nonprofit world, even though some of the strongest and best-recognized brands are built on sturdy nonprofit business models. YMCAs were initially formed to assist individuals caught up in the sweeping migration of the American population from farm to factory. Big Brothers Big Sisters’ model is to broker healthy relationships between adults and children at risk. United Way’s workplace fundraising of the last century was a dominant model.

As with so many other things, there is no universally accepted definition of a business model. Here is an adaptation of Clayton Christensen’s work in for-profit business models. The classic nonprofit has to create a successful mix of three elements: resources, program design, and impact. All of these components have to be successful and fully aligned or the model won’t work. Any given nonprofit can be said to have a single business model for the entire entity, or it can have several models for different programs and services.

The resources that support a business model will take many forms. Revenue streams are perhaps the strongest shaping factor in a business model. By definition, public charities have to have sufficient revenue from public sources such as individual donations, foundation grants, and government revenue. Earned income is another proportionately more important source today. And then there are sources such as memberships and passive income (earned interest, rental income, etc.). Even subtle long-term fluctuations in a model’s revenue streams can change operations considerably.

Assets might be another component of a business model. Some nonprofit models require little more than staff time to carry out, while others demand significant investments in property or equipment. The acquisition and maintenance of these assets — or the lack thereof — will frequently determine the success of a model.

An organization’s capital structure is a major, albeit, poorly understood and often seemingly invisible part of a business model. Capital structure refers to the mixture of ways that an organization derives its financial core. For a nonprofit, capital can only come from profit, borrowing, or capital donations. Capital is rarely easy for a nonprofit to acquire, so maintaining it at the proper levels is crucial. The inability to acquire the right amount of capital can be a sign of a poorly executed (or poorly conceived) business model.

Unless a nonprofit exists solely to create new knowledge or experiments, it will have to figure out how to perform a related body of tasks over and over again. This is what the term program means in its simplest sense. In most nonprofits the single largest component of programming is its staff. The nature, culture, training, and management of staff members are the greatest determinant of program success.

Also important is having clear-cut processes for carrying out the program. These take the form of instructions, templates, guidelines, best practices, and institutional knowledge. Whatever end result the nonprofit and its consumers and funders desire, the mechanics of the programming is how they will achieve it. Using the performing arts as an example once again, the ability to put on a well-regarded play night after night is at the heart of the organization’s value. The actors, the script, the set and the props are all part of the programming that the organization has to master.

As a practical matter, the degree to which a program and its desired effect can be replicated is an integral part of the business model. This can be a tricky area for many nonprofits’ business models because if true replicability of results isn’t possible it undercuts the model’s value.

Impact is what donors and funders are paying for the nonprofit to provide. It consists of the changes in the service user and/or society as a whole that are achieved because of the first two components. In the for-profit world, this would be called a value proposition. For nonprofits, it must be the public benefit they achieve that justifies the donations and funding they receive and the tax exemption they enjoy. Owing to the widespread lack of agreed-upon metrics in the nonprofit sector (among many other factors), the inability to prove impact is often where nonprofits’ business models are the weakest. When this condition is true, the business model is always susceptible.

Business models don’t always function smoothly. There are many indicators of a broken business model. Some of the most common are described below.

Chronic deficits. The most recognizable sign of a broken business model is the presence of chronic deficits, either on a program level or for the entity as a whole. It should be noted that deficits, especially in specific programs, are not automatically a sign of business model problems.

Some activities that run consistent deficits might act as feeder systems for other, profitable activities. There might be external considerations warranting tolerance of deficits in exchange for less quantifiable benefits. Still, persistent entity-wide deficits are the surest sign of a business model that simply doesn’t work.

Declining cash balances. Chronic deficits will eventually result in cash shortages. The problem was recently noted in this column (Beating the Death Spiral, NPT, October, 2009). Flawed business models don’t cause all such situations, but many find a home there. Fixed obligations, such as ownership of a too-large building or outsized debt loads, are often behind this kind of insidious decline.

Too many unrelated programs and services. Better known as mission drift, an overload of unconnected and siloed programs and services can impose a kind of hyperactivity tax on an organization. The distinguishing characteristic here is not the sheer number of programs and activities but rather their starkly differing natures. When business models are lumped together the result is fragmentation and diseconomies.

For example, grouping together in one entity programs and services that depend on skilled staffing levels as part of a business model can produce synergies. Adding a program model that requires a heavy investment in real estate forces the nonprofit to create a whole set of competencies that don’t complement staff-intensive programming. Carried to an extreme, this actually weakens the organization.

Choosing business models is a classic way of implementing a strategy but sometimes an organization just doesn’t seem to get it done. Flavor-of-the-month strategies can be a sign that management is indecisive, but they can also be caused by poorly designed business models. Expanding a performing arts organization’s audience by reaching a new demographic can be a legitimate strategy, but a poorly conceived business model for doing so could doom the effort from the start.

Every nonprofit will have at least one business model, no matter if it is largely informal or even unrecognized internally. Entirely a conceptual construct, a business model can be a rock-solid foundation for strategy implementation. Unattended or poorly designed, it can be just as powerful in the wrong direction.

Shape it with care and use it to stay ahead of market changes, and your business model will be a powerful tool for shaping the affairs of your nonprofit.


Thomas A. McLaughlin is a Massachusetts-based consultant and educator. He has worked with the Nonprofit Finance Fund and is and a member of the faculty at the Heller School for Social Policy and Management at Brandeis University. His email address is


Sponsored Podcasts

Welcome to the Raise & Engage podcast, a filters-off series for nonprofit professionals hosted by Blackbaud's straight-shooting expert Danielle Johnson Vermenton. During this open-mic session, you’ll hear honest advice to help YOU do more for your cause.

Episode 6: The Power of ‘No’ at Work|| daniellejohnson-76

You have a job description, but on any given day, you're probably doing dozens of things outside the scope of that description. Combine that with the challenge of a fast-paced environment and the shifting priorities of funders, colleagues, and board members and it’s easy to fall short of doing your best. By being mindful of your limitations and capacity—and saying “no” when your plate is full—you can actually do more for your cause. In the sixth installment of the Raise and Engage podcast Danielle Johnson and Robin Anderson discuss the power of saying “no” at work.

Episode 5: Professional Development: Getting Un-Stuck|| daniellejohnson-76

In the most recent episode of Raise + Engage, Danielle is back with Brian Reich from little m media to discuss how nonprofit professionals can stay motivated and energized in their day-to-day roles. Brian shares his experience working with nonprofits and the lessons and tips he's learn from and shared with them over the years, including tips for avoiding a professional rut, creating forward momentum in your career and pushing yourself outside of your comfort zone. If you're considering making a career move or want to ensure you're on the right path, you won't want to miss this inspo-packed episode!

Episode 4: Apps and Hacks to Stay (Mostly) Sane || daniellejohnson-76

Episode 4: Apps and Hacks to Stay (Mostly) Sane, is all about tips, tricks and tools for sanity. Blackbaud’s own interactive product marketer, Julia Lenz, joins host Danielle Johnson to share some high tech. (and no tech.) productivity tips to help nonprofit professionals stay sane in the crazy world of philanthropy.

Tune in to hear:

  • Tips for how to spend the first 30 minutes of your day
  • The benefits of 15 minute meetings
  • Why notebooks are still relevant to a successful organization
  • Ideas for better managing your inbox
  • Why you should take lunch outside the box
  • ...and much more!
Don’t forget to visit the #NoFilterNonprofit Hub afterwards to download our newest tip sheet10 Productivity Hacks for Nonprofits.

Episode 3: Tech. Connection: Solutions, Strategy, and Staff || daniellejohnson-76

Episode 3: Tech. Connection: Solutions, Strategy, and Staff In episode 3 of the Raise + Engage podcast, Danielle Johnson is joined by Chris Geady and William DaSilva, two IT experts in the nonprofit space, to talk technology integration for NPOs: when you need it, when you don’t, and how to do it successfully.

Tune in to hear:

  • When to say NO to integration
  • How to set your strategic plan before even looking at technologies
  • Ways to get your entire team on board
  • The importance of identifying a project lead
  • The RFP process - how it should and should not go
And William shares a story about a nonprofit that may or may not have still been using a typewriter. You don't want to miss this one!

Episode 2: From Socially Awkward to Socially Awesome! || daniellejohnson-76

According to Danielle Johnson, straight-shooting host of the Raise + Engage podcast series, if your staff members aren’t the number one advocates for your cause on social media, you’re failing. In the most recent episode, Danielle is joined by Blackbaud’s own social media guru Madeline Turner to discuss overcoming social struggles and creating a social ambassador program at your organization. This entertaining and insightful duo dishes on the importance of making your social media presence human, making the case for a formal social program to leadership, how University of Michigan turned a one time social media campaign into a long term social program, and how Madeline's mom unknowingly became a social ambassador on #GivingTuesday.

Episode 1: Corporate Culture & Development: Shake It Up! || daniellejohnson-76

In the premiere episode of Raise & Engage, Danielle is joined by three straight-shooting nonprofit rock-stars: Jodi Smith of Sanford Health Systems, Veronica Brown of Chicago Public Library Foundation and Ali Burke of Southlake Regional Health Centre Foundation. The group talks organizational culture, problem employees, why its important to celebrate and how to shake things up this year and build a better more authentic team that gets stuff done!


Stay informed, catch latest trends in the nonprofit space.

Subscribe to Our Free Newsletter

No obligation, unsubscribe at anytime.

Success! Check your email inbox.

Follow Us On Twitter

NPT 2016 Buyers' Guide

Newsletter Sign-up

click here to return to the previous page