An excerpt from Linking Mission to Money.
Chapter 8 p. 26 "Profit-making by Nonprofits"

It is curious that charitable organizations are called nonprofits because it is a misconception that nonprofits are supposed to lose money. On the contrary, all nonprofits need profits in order to survive.

Nonprofits are characterized by how they spend their profits, not by whether they earn profits. The principles that govern nonprofits mandate that nonprofits plow their profits back into the level, quality, or reliability of services. Excessive salaries for staff or board members, overly costly office facilities, or travel or entertainment that cannot be clearly connected with and justified with respect to service delivery are considered inappropriate for nonprofits.

A nonprofit has an obligation to its community to be a reliable provider of a service which would not otherwise be provided. Financially, there will always be good years and bad years. Sustainability requires that the organization have some money set aside to weather bad years. The only way to get that money is to earn more than you spend in some years; that is a profit. Endowments are accumulated by setting aside extra donations; once again, a profit. Deficits are financed with reserve funds, and reserves are past profits.

Similarly, most nonprofits provide a number of services. A user's ability to pay often varies with the service. The reality is that a viable nonprofit makes its ends meet by offering some services that do not fully pay for themselves (unprofitable services) and other services than bring in more money than they cost (profitable services). While a for-profit may have some items that it sells at a loss (loss-leaders), the role of those items is to attract customers that will simultaneously purchase profitable items so that the total purchases of that customer are profitable. In contrast, the nonprofit is willing to have all the purchases of some customers be unprofitable. To be viable, however, the nonprofit must be able to attract some profitable customers as well or to have a significant fundraising effort, which is akin to having paying customers who ask for nothing in return.

A nonprofit providing profitable services is not bad or greedy or dishonest; it is necessary. For example, nonprofit hospitals usually lose money in their emergency rooms and obstetric wards, as well as on uninsured patients. They usually remain financially viable by making money in their cardiac and orthopedic wards and on their privately insured patients. Museums often lose money on school groups, but make money on gift shops.

The choice and mix of profitable and unprofitable activities is a critical policy decision of the board so it is essential that you know which of your organization's activities run profits or are self-supporting and which activities lose money or are not self-supporting. You may find that looking at your organization in this way dramatically alters how you think about each activity's goals and prospects. It may even alter your view of your mission, priorities, and long-term financial plan.