Are you discouraged by the tiny amount of cash that most contracts allow for leadership? I’m Dr. Ron Tompkins and our topic today is cash for leadership. Government contracts assume that the brains are located with government and the role of the nonprofit is hands and feet. So the extra cash for leadership including a fair salary for you has to come from other sources. Fundraising is the most popular but hospitals, universities, and other nonprofits also use embedded revenue.
Embedded revenue is a fee-based product or service added to NonProfit Contracts that may or may not be related to your mission. Dennis Young and others label these as favored, neutral, or disfavored revenues. The question for all three embedded sources of revenue is – does it add cash after expense or does it cost $1,000 to add $900?
Favored Embedded products or services help you in your primary mission. Let’s assume that you have a food contract. One of the rules is that only clients may eat the food. Any extra food must be discarded and staff may be fired for eating leftovers. You discuss this with the food vendor and they offer to supply extra meals for staff as a separate agreement. You will charge staff for these meals but it offers a lot of convenience. They don’t have to travel for lunch and most staff appreciate the offer to buy lunch. You are making working conditions better for staff and better staff morale helps your mission.
How much do you charge for the lunch? You may not care because the favored embedded lunch revenue helps your mission. Are there any potential Favored Embedded Revenue sources that build your mission and add to surplus?
Neutral Embedded Revenue are products or services that you add to NonProfit Contracts when it’s profitable and close down when it is not profitable. You might decide to sell hand sanitizer when there is a health concern and stop selling it when the market disappears. There are conditions that stop your neutral embedded revenue – 1. People don’t want it now. 2. Unrelated items or services may create income or sales taxes so the income has to pay for more than the product. 3. There may be sales, planning, and custodial labor to sell the product so the price has to cover these costs also. And 4. The way or place in which it’s sold may reduce contributions or increase inspections so the price may have to cover reduced contributions, a new license or renting an additional location.
Disfavored Embedded Revenue is when you offer products or services that bring new revenue but hurt another area of your agency. Let’s consider 3 examples. A school has a tuition-based program. Another site of the school nearby has a chance to acquire a grant that would offer free services to 25% of the students who are now paying tuition. Suddenly there is a need for leadership time, sales, and marketing labor to replace the students in the fee-based program. The grant likely doesn’t not offer enough revenue to offset all of those extra costs. You will add to revenue but actually might reduce your surplus and cash for leadership.
Another example of Disfavored Embedded Revenue is a complaint from the college health center that the student center has a large selection of sugar and fat-based snacks for sale. The disfavored revenue has created a conflict between two departments. The university moved candy vending kiosk at a student bus stop near the campus so that the candy is not associated with the college in the minds of students. All these accommodations and discussions have a cost that will affect your surplus. Is it worth it?
Yet a third example of Disfavored Embedded Revenue is a clinic which sponsors a flea market every quarter for former and current patients. They pay $100 for a stall, the clinic adds their own food concession, and the community is invited. It’s popular and raises about $50,000 per year but donors start to reduce gifts. Donors reason that their money is not needed since the clinic is self-funded now. The flea market has to raise enough money to cover the missing gifts and staff labor in addition to other costs and the $50,000 surplus. Can they do it?
Generally Disfavored Embedded Revenue has to offer a large contribution margin in order to be successful. It’s not easy.
So where is your extra cash source? You should consider Favored Embedded Revenue because it helps your mission. A college bookstore can add quite a lot of revenue and profit while supporting the mission. What are your possible Favored Embedded Sources that help your mission and create a lot of surplus?
Disfavored Embedded Revenue added to NonProfit Contracts is usually for agencies larger than $6 million in revenue. The challenge is the leadership capacity to make everything work well to get that extra profit.
Neutral Embedded Revenue is the friend of small agencies. Look for small additions to products or services that don’t require a lot of labor or inventory. You need a good financial director to watch the bottom line.
Nonprofits face more challenges than a local Walmart. You have to protect your mission with a patchwork quilt of contracts, gifts, fee for services, grants, and volunteers. Fortunately, coaching can assist in making the pieces fit. If this conversation makes sense to your situation, call me and I’d like to hear more.