Introduction
Their name implies that non-profit businesses do not focus on revenues. However, they still need sufficient financial resources to ensure that they can operate and meet their goals. Currently, non-profits have three sources of revenue, including philanthropy, earned income, and government. It is challenging to mention which of them is better because the three have particular advantages and disadvantages, but one can state that a government grant is appropriate to cover direct and indirect costs.
Revenue Sources
Philanthropy is a popular source of revenue for non-profit organizations. A significant advantage refers to the fact that this activity is widespread, meaning that both individuals and entire businesses can engage in it. However, this revenue channel implies a disadvantage because philanthropic giving rates remain approximately the same while the number of non-profits keeps growing (Worth, 2020). This information demonstrates that modern non-profit organizations suffer from insufficient philanthropic resources, denoting that this source cannot cover all the expenses.
According to the information above, it is not surprising that some non-profit organizations use earned income to cover their expenses. Thus, healthcare institutions are the most obvious examples of non-profits relying on this revenue source because they provide services for specific fees. On the one hand, the advantages of this approach relate to the fact that organizations obtain an opportunity to diversify their revenue sources and control their financial operations. This strategy also provides non-profits with the possibility to advance their missions and achieve more goals (Worth, 2020). On the other hand, relying on earned income is challenging because it leads to increased risks for non-profits and the necessity to invest more efforts in proper financial management. These were the leading advantages and disadvantages of the selected revenue source.
In addition to that, government funding is another potential source of revenue. It is advantageous because governments often support non-profit organizations to improve their reputation and solve various issues. However, this approach also implies particular disadvantages that deserve attention. Worth (2020) admits that government funding has significantly declined when assessed historically. It is possible to suggest that non-profits will obtain fewer financial resources from the government in the future. Furthermore, governments often rely on competitive contracts to provide non-profit firms with funding (Worth, 2020). As has been mentioned above, the number of such organizations keeps increasing, which means that these businesses face harsh competition to receive funds from the government.
The information above has commented on the primary sources of non-profit revenue. The analysis of the data reveals that each of them implies certain advantages and disadvantages. That is why it is impossible to state which option is better for non-profits. It seems that the most appropriate way is to rely on the three sources simultaneously because this approach will provide an organization with diversified financial resources, which contributes to continuous operation.
Direct and Indirect Cost
When it comes to accounting and financial management, it is necessary to comment on the difference between direct and indirect costs. On the one hand, costs are direct when they can be straightforwardly associated with a specific product or service. For non-profits, these are expenses that directly allow an organization to provide its services to customers. For instance, an organization cannot meet its objectives if staff members do not receive salaries. On the other hand, indirect costs refer to those general expenses that allow a business to operate but do not directly address the delivery of service. For example, they include rent, general office expenses, utilities, and others. Every business is forced to bear direct and indirect costs while manufacturing goods or providing services, and non-profit organizations are not an exception.
As far as my personal opinion is concerned, I would want a government grant to provide funds for direct and indirect costs. According to Worth (2020), a grant is “an award of money made by the government with the hope that a public purpose will be achieved, but the services are not provided to the government” (p. 432). Once these financial resources are obtained, I will have relative freedom to decide on how money should be better allocated to achieve a specific objective. Consequently, grants provide non-profit organizations with an opportunity to make autonomous decisions on how to bring positive changes to society. Such a possibility is positive because non-profits can face unexpected challenges in implementing their programs, and this freedom will help manage them.
Conclusion
In summary, the paper has overviewed the primary revenue sources of non-profit organizations. They include philanthropy, earned income, and government funding, and it is worth admitting that each of them implies specific advantages and disadvantages. That is why it is impossible to state which source is better, while an optimal approach is to rely on the three simultaneously. In addition to that, the paper has commented on the difference between direct and indirect costs. Since every business is forced to deal with them while manufacturing goods or distributing services, non-profits should also be aware of them. It seems that such organizations should rely on government grants to have funds for direct and indirect costs.
Reference
Worth, M. J. (2020). Nonprofit management (6th ed.). SAGE Publications, Inc.