How Do Nonprofits Make Money? Revenue Models for Small Organizations

Two beliefs tend to travel with this question: that nonprofits are not allowed to make money, and that they cannot pay their staff. Both are wrong. The harder question belongs to the executive director of a small organization: which of these sources can yours actually run? Each brings its own strings, timing and workload. What happens to the money once it arrives is covered in our nonprofit financial management guide.

Can a nonprofit make a profit?

Yes. A nonprofit can, and often should, take in more than it spends in a year. The IRS rule is about who benefits: none of a 501(c)(3)’s earnings may inure to any private shareholder or individual. The surplus stays in the organization and pays for reserves, equipment and next year’s programs.

A business distributes its profit to owners. A nonprofit has no owners, so the money goes back into the work. When an insider takes an improper benefit, such as pay far above what the job is worth, the IRS can impose an excise tax on that person and on the managers who approved it.

A surplus year is good news. Several in a row build the reserves that carry an organization through a late grant payment. The surplus shows up as the change in net assets on your statement of activities. How much surplus suits your organization, and how to report it, are questions for your accountant.

How do nonprofits make money to pay employees?

Nonprofits pay employees the same way businesses do, out of revenue. Salaries come from unrestricted money, such as individual gifts, general operating grants and earned fees, and from restricted grants whose budgets include personnel costs. The board sets the executive director’s pay, and the IRS expects that pay to be reasonable for the work.

Reasonable compensation has a defined process behind it. Under the IRS rebuttable presumption, pay is presumed reasonable when board members without a conflict of interest approve it in advance, rely on comparability data for similar jobs, and document their reasons at the time. For the ranges boards see, read what nonprofit executive directors are paid.

Finding the money is the harder part. Many program grants cover the staff named in the proposal and little of the overhead, which leaves the executive director’s salary, the bookkeeper and the rent to unrestricted revenue. Small organizations also lean on volunteers for work they cannot yet pay for.

Often the gap lands on the leader. One executive director who applied to CNPC for coaching put it plainly: “We have a $100K budget with three highly underpaid part-time staff members including myself.” Underpaying yourself to keep a program open is a pattern CNPC sees in applications from small organizations. Make it a decision you take on purpose, with your board, instead of by default.

What are the main nonprofit revenue sources?

The main nonprofit revenue sources are individual giving, foundation and corporate grants, government grants and contracts, earned revenue and investment income. Individuals give the most. Giving USA 2026 estimates that charitable giving in the United States reached $617.2 billion in 2025, and individuals gave $394.2 billion of it, about 64%.

Foundations gave $117.15 billion, bequests $62.19 billion and corporations $43.67 billion. Those figures count gifts only. Across all public charities, the biggest revenue line is program service revenue: close to 71% of the revenue public charities reported on Form 990 came from program services such as tuition, patient charges and admission fees (IRS Statistics of Income, tax year 2019).

Hospitals and universities drive that number. Public charities with more than $10 million in assets filed 9% of the returns and reported 90% of the revenue. A $300,000 community organization looks nothing like the sector average.

Government grants are concentrated too. Candid’s 2025 analysis found that roughly 30% of nonprofits filing a Form 990 receive them, rising to 55% of organizations with budgets above $5 million. The table compares what each source asks of a small staff.

Grants deserve a second look before you apply. A grant that funds a new project without paying for the staff time to run it can cost more than it brings in. Some funders do pay for leadership and capacity, the subject of our guide to grants for leadership development.

Government contracts add a timing problem. When a contract pays by reimbursement, the organization spends first and bills afterward, so it needs cash to carry the gap.

Earned revenue is anything a nonprofit charges for: program fees, service contracts, workshop tickets, a thrift shop. It is flexible money when the price covers the cost of delivery. Income from a business unrelated to the mission can owe tax, covered in the questions below.

What revenue models fit a small nonprofit?

A practical way to sort small-nonprofit revenue is by what leads it: grants, individual donors or fees. A grant-led organization depends on a few funders and their priorities. A donor-led one depends on relationships with many individuals. A fee-led one depends on clients who can pay. Each model rewards a different skill, and each one breaks in a predictable place.

These are the organizations CNPC hears from most: 67 of the 152 coaching applications in our February 2026 intake review came from organizations with operating expenses under $250,000.

• Grant-led rewards proposal writing and program design. It breaks when a major funder changes strategy or a renewal slips.
• Donor-led rewards relationships and fundraising events, and breaks when the executive director who holds those relationships burns out or leaves.
• Fee-led rewards pricing and reliable delivery. It strains when the people who need the service most cannot pay.

An illustrative composite shows the grant-led break. Picture a $300,000 youth program with 70% of its revenue from one foundation. The foundation adopts a new strategy and will phase out its grant over two years. The executive director must decide what to protect, whether to replace the money or shrink, and what to tell the board and staff. In CNPC’s work with executive directors, “next quarter” often depends on whether a grant renewal comes through.

One question helps in that moment: if this grant ended next year, which part of the mission would you protect first?

Every revenue source has a cost to raise and strings attached. The right mix is the one your organization can actually run.

Should a small nonprofit diversify its revenue?

Only as far as it can run the extra sources well. Every new revenue source adds work, and in a small organization that work lands on the executive director. A small nonprofit can be stronger with two or three sources it runs well than with six it runs badly, provided it manages the risk of depending on one funder.

Revenue diversification is standard advice, and the evidence from the biggest nonprofits complicates it. William Foster and Gail Fine of the Bridgespan Group studied the 144 nonprofits founded since 1970 that had reached $50 million in annual revenue. Roughly 90% of the 110 with solid financial data had one dominant source of funding, which supplied just over 90% of their money on average (Stanford Social Innovation Review, 2007).

Those organizations still managed risk, by spreading it across many payers of the same type, such as several state agencies. The study covers very large organizations, so the lesson for a small one is narrower: add a source when you can staff it, and reduce dependence on one funder by finding more funders of the same kind.

Why does unrestricted revenue matter most?

Unrestricted revenue is the only money a nonprofit can spend on whatever it needs most: rent, a payroll gap, the bookkeeper, a late reimbursement, a reserve. Restricted grants pay for their own projects. When unrestricted money runs short, the organization has no cushion, and the executive director spends the year chasing cash instead of leading.

Many organizations are already short. In the Nonprofit Finance Fund’s 2025 State of the Nonprofit Sector Survey, 36% of respondents ended 2024 with an operating deficit, the highest share in 10 years of the survey, and 52% had three months or less of cash on hand.

Two habits help. Track unrestricted revenue as its own line in every monthly report, so the board sees it early. Then build next year’s budget from the unrestricted money you can count on, and add restricted grants on top.

Before you accept a restricted grant, ask what it pays toward overhead and who will write the reports. If the answers are “nothing” and “you,” price your own hours before you say yes.

Which revenue would you stop chasing?

Start with the question most revenue advice skips: which source would you stop pursuing if you could see its true cost? List every source with what it brought in last year, whether it was restricted, and the hours it took. The source with the most hours for each unrestricted dollar is the first one to question.

Deciding what to say no to is a leadership choice, and it is easier with someone to think it through. CNPC offers coaching for executive directors carrying the finances: six sessions with a volunteer coach, at $300, $400 or $600 depending on organization size. Our coaches donate their time, which keeps fees 85%+ below market rate. Coaching will not keep your books or settle a tax question; that is your accountant’s work, and we say so when a problem needs technical help. When you are ready, apply for coaching.

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