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A national recession reportedly is on the way that could negatively impact funding for many local nonprofit programs. That’s not the bad news.

This time will be different. Nonprofits tend to survive recessions, albeit with considerable tenacity. Today, however, a lot of them directly or indirectly receive government funding for their services. Many of their donors work in public service and companies that support it. As funding for USAID and other large public programs is being cut, nonprofits are losing revenue that donations alone cannot easily replace.

Compound those losses with the impacts of a recession, and the financial challenges for nonprofits are poised to “moon.” On the upside, this opens the opportunity for nonprofits to innovate, expand and take over providing aspects of important public services if new efficiencies, innovations and sufficient funding can be found.

PRIDE Industries, Paratransit, Nehemiah Corporation of America and Alchemist Community Development Corporation are among the nonprofits in the region operating programs that produce notable revenue solving community problems in innovative ways. Goodwill Industries International, The Nature Conservancy, Kaiser Permanente, Sutter Health, Mercy Health and Feeding America earn billions annually to deliver community benefits on a large scale.

Numerous nonprofit thrift stores, food services, recycling centers, custodial services, consulting firms and other small social enterprises produce revenue that makes every donated dollar go further. Innovative, sustainable community enterprises can attract capital. In addition to select local donors and grant makers, there are impact investors, lenders and grant makers, along with venture philanthropists who are potential sources. Hundreds of millions of dollars are under management in the U.S. and around the world for specifically that purpose.

With social enterprise and a recession in mind, the idea of more organizations looking at becoming a “profitable nonprofit” may be timely. However, not every community cause is suited for developing earned revenue. For example, efforts to protect human rights or save old growth forests are not usually funded by merchandise sales. Donations are needed more than ever by those kinds of programs. For the rest of the nonprofit community, donations combined with earned income can conceivably produce enough to keep key programs alive and even growing during the potential-recession environment of today.

Many people, including some nonprofit board members, are surprised nonprofits can earn income at all. Nonprofit tax-exempt corporations can do what any other business can, with some notable differences. Earnings, for example, must match IRS-approved tax exemption criteria, or unrelated income taxes may be owed, and an organization’s nonprofit tax status can be reviewed. Also, income cannot unduly benefit private individuals or insiders in forms like dividends or unjustifiable high compensation.

Experienced managers caution nonprofits about starting a new enterprise, simply because it is not easy. It is challenging to run any business, especially one that must produce profit and a verifiable social or environmental good. Relying on donations and sometimes the capital market while being managed, in many cases, by social services staff and volunteers only makes it harder.

Adding or switching to an earned income model along with raising donations requires skills not present in every nonprofit team. Board members, well-chosen volunteer advisors and consultants can give valuable advice. Corporations and foundations that like hands-on involvement with the nonprofits they support also can provide value.

The predicted recession may not happen, or it may be mild, followed perhaps by a new surge in business wherein nonprofits flourish (hope abides). Meanwhile, the threat being created may benevolently inspire more nonprofits to do visionary planning that includes developing a mission-aligned social enterprise.

When it works, benefits can include more financial stability, mission advancement, diversified revenue, increased impact, enhanced community engagement, increased capacity and expertise. It may also attract mission-driven investors and increase reinvestment capacity, competitive fundraising advantage and long-term resilience.

A word of restraint: The very suggestion of starting a new enterprise could come as a bone-crunching idea for some executive directors of smaller nonprofits that are already understaffed, underfunded and continuously on-call fulfilling their missions. “Are you kidding?” would be a reasonable response. In those circumstances, the task may be given to the board or an ad hoc committee of friends to explore. Otherwise, let it go for now.

At the far end of the downside, it is normal in a recession that some nonprofits will have to consider closing. An uplifting community-minded business option is to look for a positive exit or merger with larger, more stable organizations that have related missions. It is a delicate and often difficult transition to manage, but it is a potential win/win for both groups and the community.

The end goal is that the nonprofit sector continues to thrive using all means available to help the Capital Region remain a vibrant, healthy and humane place in which to live and work.

For more information and support for starting and growing nonprofit social enterprises, contact the Impact Foundry, the Sacramento Region Community Foundation, the Carlsen Center for Innovation and Entrepreneurship at Sacramento State, Sacramento Venture Philanthropy or the UC Davis Small Business First program.

For innovative, potentially high-value projects, contact the Sirolli Institute, Evolution Accelerator, Growth Factory, StartupSac, CleanStart, Startup Folsom and other early-stage acceleration and investment companies in the region that are too numerous to mention.

Charley Ansbach is a social entrepreneur, fundraiser, author and professor of social entrepreneurship and corporate sustainability. He sits on multiple nonprofit and for-profit boards, helps nonprofits conduct capital campaigns and advises early-stage companies on sustainable practices. Email at cansbach@ansbachassoc.com.

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