Does it help a nonprofit to have a profitable side business? Apparently not. A new study [2] presented by a Pace University researcher yesterday at the Satter Conference on Social Entrepreneurs at New York University examined 700 tax returns from New York non-profits, finding that the more money brought in by side-businesses, the smaller the proportion of total expenses spent on the organization's actual mission. The organizations examined included well-known examples like the American Foundation for the Blind, God's Love We Deliver, and Boy Scouts of America.

The study, by Pace's Rebecca Tekula, follows a hunch articulated in a 1988 book by the economist Burton Weisbrod called "The Nonprofit Economy," a book which noted an increasing trend toward profit-making arms of non-profits. By 1982, for instance, the Girl Scouts were selling 124 million boxes and grossing $200 million annually. Though Weisbrod had hypothesized that the trend was not good for the non-profits, the hypothesis had not been tested till Tekula's study, whose look at 700 organizations that provide human services concludes that, in the words of a press release, "the more they brought in from their businesses, the smaller were their proportion of total expenses spent on programs."

Tekula speculates that many organizations actually don't invest their profits in the actual services of the organization, but simply reinvest them in the side-businesses. "Running a gift shop or anything that isn’t an integrated part of your program may be bringing in money--gross revenues--but if it’s not making a profit, you’re keeping it going with funds that you could have spent on counseling and food for your clients,” she said.

It's a problem that could benefit from further study. Even if it were true that the rise of the Thin Mint has resulted in a smaller fraction of Girls Scouts of America's organizational dedication to services, one could argue that so long as the pool has grown substantially, services still benefit. Quick thought experiment: 10% of 200 million dollars is far more than 100% of 200 thousand dollars, after all.

Still, the notion that the increasing trend of for-profit arms of businesses might be leading to a sort of "mission distraction," in Tekula's words, is troubling. For groups that may be taking the enterprise component of social enterprise too seriously, she counsels an old-fashioned strategy: asking for charitable donations.

[Image: Flickr user antigone78 [3]]