When the so-called Great Recession hit the nation over a decade ago, many nonprofits found themselves struggling to stay afloat financially. Not all of them survived. Organizations with only one or two sources of revenue were particularly vulnerable, yet, more than a decade later, some nonprofits continue to struggle. It’s only a matter of time until the country enters another recessionary period, so now’s the time to ensure your revenue streams are sufficiently diverse.
Varied revenue sources
As some organizations learned the hard way during the last recession, relying on a single source of revenue can leave you with empty coffers if that source dries up. For example, nonprofits that were dependent back then on state funding for their budgets had to scramble as states across the nation began reducing, suspending and even eliminating grants.
Of course, governmental funding isn’t the only source that could unexpectedly disappear. Tough economic times can hurt major gifts, corporate giving, ticket sales for fundraising events, individual donations and foundation grants. If you sell goods or services, you might see sales dry up as people are forced to cut back on personal spending.
Road map to diversification
Financially stable nonprofits have a good mix of revenue streams, with no one stream or source accounting for more than 25% or 30% of the budget. The following steps can help you get there.
Perform and present your initial evaluation. Nonprofit boards of directors sometimes are reluctant to add revenue streams, but a visual aid can help them understand the need. It’s easy to generate a pie chart in Excel that will show each source as a percentage of the total revenue. You also might want to include benchmarking data that shows how your revenue mix compares to those of peer organizations.
The initial evaluation should include a review of future plans and anticipated expenses, too. Present the board with multiple scenarios where those costs are compared to revenues with and without the current revenue sources. Seeing how eliminating a revenue stream could jeopardize the mission may be the nudge reluctant directors need to embrace diversification.
Determine appropriate additional revenue sources. Keep everything on the table as you begin this part of the process. Consider a wide range of potential sources, weighing the pros and cons of each, including implications for staffing and other resources, accounting processes, unrelated business income taxes and your organization’s exempt status.
In addition, assess how well aligned potential sources are with your mission. For example, has that foundation grant you’re thinking about pursuing ever been awarded to another nonprofit serving your population? Does the company that has proposed a joint venture engage in practices counter to your values?
Develop strategies for each new source. You don’t want to put all your eggs in one basket, but you also don’t want to depend on too many “baskets,” because each new revenue stream will require its own strategy. Executing too many implementation plans can strain resources.
Each plan should include initial and ongoing budgets, as well as any new systems, procedures and marketing campaigns that will be needed. It also should have a timeline with milestones to facilitate monitoring.
Review and adjust as necessary. Take the time at the end of every month — don’t wait until year end — to closely review each revenue source. Is it living up to expectations? Is it costing more than expected or falling short of revenue projections?
If a source fails to deliver over time, don’t feel tied to it. Your financial advisor can help you figure out whether it’s best to let it go and try another route.
Patience is crucial
You can’t add significant revenue streams overnight — it takes time, especially if you’ve relied on one type of revenue for a long time. But that’s more reason why organizations with only one or two revenue sources should start diversification plans now.
Major donors aren’t just for the big guys
For some nonprofits, the term “major donors” brings to mind Bill Gates or similar charitably inclined multimillionaires — the kind of donors who think big and probably wouldn’t be interested in their small organizations. But every nonprofit should work to cultivate the kinds of donors who qualify as “major” to them.
While large organizations may define major gifts as those with six or more figures, you might regard a gift with four figures as major. Review the past 10 years of donations to identify your largest gifts and work from there to generate similar gifts. Look for philanthropic individuals with both the financial capacity and the interest in your specific mission. Highlight historically generous donors but also review lists for infrequent donors, event attendees and similar prospects.
A little extra research can uncover other organizations they’ve supported and personal information that can help you build a relationship with these prospects. If you lack the staff resources for such detective work, use volunteers. You also might invest in wealth-screening software, such as DonorSearch or WealthEngine.