Planning for Sustainability: Developing a Fee-for-Services Structure
Learn how you might set up and use a fee-for-service structure to develop dependable funding for your organization over the long term.
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WHAT IS FEE-FOR-SERVICE?
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WHAT ARE THE ADVANTAGES OF FEE-FOR-SERVICE?
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WHAT ARE THE DISADVANTAGES OF FEE-FOR-SERVICE?
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WHO MIGHT PAY FOR YOUR SERVICES?
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HOW DO YOU DEVELOP A FEE-FOR-SERVICE STRUCTURE?
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HOW DO YOU SUSTAIN A FEE-FOR-SERVICE OPERATION?
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SUPPOSE THAT, INSTEAD OF A NON-PROFIT, YOU WERE A SMALL BUSINESS. HOW WOULD YOU OPERATE?
If you were like most small businesses, you'd be trying to sell your services in the marketplace at a price that was not so high that consumers wouldn't buy, but high enough so that you could make a profit.
Well, surprise! Whether you realize it or not, you are a small business. But if you're like many non-profits, you may have restrictions on what you can do that most small businesses don't have to worry about. Funders may tell you exactly what you can spend money on and it may not be exactly what you need. There may not be enough money to do what you need to do, or funding may not be available for programs that you feel are necessary for the community. Wouldn't it be great if you could actually operate like a small business, and use your income in whatever way made the most sense for your organization?
One way that you could achieve this for at least part of your income is to establish a fee-for-service structure that allows you to charge for what you do. Many non-profits use such a structure either as a major source of income, or as a supplement to other funding. This section will help you understand why and how you might set up and use a fee-for-service structure to develop dependable funding for your organization over the long term. It will give you some ideas about what fee-for-service actually entails, who your customers might be, some advantages and pitfalls of this kind of operation, and how to set up a fee-for-service structure and sustain it over time.
WHAT IS FEE-FOR-SERVICE?
In its simplest terms, fee-for-service is just what it sounds like: fees paid in return for services delivered. Those services, however, could range from what your organization actually does in fulfillment of its mission (substance abuse treatment, adult literacy instruction, child care, etc.) to training providers or others to consulting with businesses and agencies. The fee-for-service structure you adopt could be very simple - charging a set rate per unit of service (per hour, per person, per workshop, per place in a program, etc.) -- or much more complex -- setting up a for-profit corporation, for instance, to make money on fee-for-service and channel it to your non-profit organization.
Regardless of the services involved or the structure through which they're provided and paid for, the goal is the same: to provide income -- particularly income that can be used in any way you choose -- to the organization over the long term.
WHAT ARE THE ADVANTAGES OF FEE-FOR-SERVICE?
AS WE'LL DISCUSS BELOW, SETTING UP A FEE-FOR-SERVICE OPERATION INVOLVES A FAIR AMOUNT OF WORK AND THOUGHT. WHY WOULD YOU WANT TO GO TO THE TROUBLE? THERE ARE SEVERAL ANSWERS TO THIS QUESTION:
- It could increase your income substantially. Grant funds often barely pay for the cost of providing services. Sometimes they are scant enough that the organization may end up subsidizing its own work out of funds that could be used instead for improvement or expansion. Fee-for-service guarantees that you'll be paid reasonably for what you do.
- You actually get paid directly for everything you do, thus confirming the value of your services. This arrangement also makes it easier to plan both your finances and your program, because you can be sure that your payment will support what you want to do.
- Fee-for-service money comes without strings attached. You can use it for whatever you choose: operating expenses, cash reserve, capital outlays. You don't need anyone's permission to spend it, and there are no time limits on spending it (no rushing around to get the money spent by June 30 or December 31, when your financial carriage turns into a pumpkin).
- It doesn't stop you from getting and using other funding for particular purposes. You can still continue to be funded from other sources as well, as long as you abide by funders' rules and don't "double-dip," i.e. fund the same person or service twice from two different sources.
- If there's a market for what you're selling, fee-for-service money has no end. You can continue to provide services and get paid directly for them for as long as your organization exists.
WHAT ARE THE DISADVANTAGES OF FEE-FOR-SERVICE?
WHILE A FEE-FOR-SERVICE STRUCTURE CAN EVENTUALLY ASSURE YOU OF LONG-TERM, STEADY INCOME, IT COMES WITH ITS OWN SET OF DIFFICULTIES AS WELL.
- It requires your organization to institute another level of fiscal management. Especially if you have public funding, you have to be careful to keep track of your fee-for-service income separately so that you can document that your public funds have been spent correctly. In addition, there are some basic business practices that you have to adhere to:
- You have to be able to show your customers that you've delivered the services you were paid for.
- You have to keep track of work that you can bill for, and of accounts receivable (i.e. the money that you're owed for services you've provided but not yet been paid for).
- You have to do the billing regularly.
- You have to make sure, especially with participants, that everyone gets a receipt for payment, and that you keep careful track of what's been paid. The reason this is particularly important for participants is that, especially if they're low-to -moderate income, they may pay in cash, and thus have no automatic record (such as a cancelled check or credit card bill) to prove they've paid.
It's essential to consider your fee-for-service structure beforehand to confirm that it will pay its way, and more. If you're taking in $20,000 a year, and you have to hire a $20,000-a-year staff member to administer the operation, all you've gained is a headache. Be sure that your gains, financial and otherwise, are worth the effort.
- It requires you to be especially careful about the regulations of your funders. Many public funders, for instance, may not allow you to mix participants being sponsored by public funds with other participants paid for by third parties or by themselves. Some public funders will only fund organizations whose services are free to all participants. You need to be sure you know the rules and understand how to follow them so as not to jeopardize your other funding.
- You have to market your services. Unless you're nationally famous and constantly in the news, you have to let potential customers know who you are, what you do, and why they should hire you to do it. That may mean a lot of work (see the discussion on marketing plans below), and it has to go on forever, or for as long as you continue to run a fee-for-service operation.
- If you're charging participants directly, you may scare some away because of the cost, especially if they're already nervous about plunging in. You may also have to deal with charges of unfairness, because some people are paying more than others, or because some are paying and others -- who are paid for by third parties or eligible for public funding -- are not.
- You may have to chase down money that's owed, or wait long periods to be paid. That's not only a pain, but it can also affect your relationship with the community. If you're trying to collect money owed by participants, you may embarrass people who are already embarrassed by not being able to pay, and ruin your image in the target population as well.
WHO MIGHT PAY FOR YOUR SERVICES?
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