Depending on your involvement in developing your nonprofit organization’s budget, you may or may not be involved in conversations about revenue streams. Revenue streams are the different pathways money flows into your organization. Diversifying revenue streams means you have multiple different pathways your organization brings in money. Why is diversifying revenue important? Great question!
Look no further than the past few months to understand the importance of revenue diversification in the nonprofit sector. When federal funding was held, some small nonprofits immediately faced a financial crisis that put the future of the organization in jeopardy. The interruption in funding left organizations scrambling to figure out how they were going to deliver programs, pay staff, and keep the lights on. Any disruption to funding has an impact on nonprofits. This is why donor retention is an important focus. This is also why stewardship is critically important to any fundraising program. But what can nonprofit leaders do to safeguard against financial crisis? Diversify their revenue streams.
Your nonprofit organization should be looking at your operating budget and examining what your different revenue channels are. It is important to learn what percentage each channel contributes to your organization’s revenue. How reliant is your budget on each revenue stream? If you find one particular channel makes up an overwhelming majority, it’s time to start thinking about diversification. If you want to learn more diversification, Nonprofit Hub is a great resource.
Let me give you an example from my work in private schools. Private schools earn revenue from tuition. It is a leading source of revenue for any school. The revenue is used to pay teachers, maintain the campus, buy supplies, and support programs. The percentage of reliance on tuition as a revenue varies widely by school and is a frequent topic of conversation in most board meetings. The overall goal is not to be a tuition dependent school. The way to achieve that is to reduce tuition dependence through diversified revenue streams. Some schools achieve diversification through donations, others through facility rentals, some earn income on an endowment that contributes to the operating budget. There is no right or wrong answer on how to diversify, so long as you are complying with IRS guidelines about mission-related income.
If your organization is more than 30% reliant on any one funding source, this may be a good time to begin the conversation about revenue diversification. Here are some tips to help you think about where to start:
- Identify the dominant source or your funding. First evaluate, are you doing everything you can to ensure the stability of this source? You don’t want to divert attention from this in a way that jeopardizes your primary income stream.
- Identify the other streams of revenue coming into your organization? Look at them each individually. Consider how you can maximize those streams. Here are some examples:
- Perhaps you have an overly conservative investment strategy? Maybe your board finance committee could review the organization’s policy to potentially increase interest gains.
- You are raising money from federal grants but not looking at community-based grants? Now could be a good time for your grants team to begin building new relationships.
- Your organization offers youth programs but you need to heavily discount fees to make them affordable. Could you build an endowed program fund to create a steady stream of revenue?
3. Find the gaps. This is the hardest part. To identify the gaps you need to be creative. You need to see what’s not already there. How else might you generate revenue that your organization is not currently thinking about? Does it align with your mission? This is an excellent brainstorming activity to engage your board and leadership.
I’ll offer a cautionary point regarding developing brand new revenue streams. Do your homework! It might seem like a great idea with a small group but take the time to really dig into the complexities of your newly identified channel. Consult with outside experts. Your attorney and accountant should be two of your first calls. Identify experts in that space and get outside opinions. Diversifying revenue should be tied to organizational strategy and not done in isolation. When you think you have finished your homework, create an action plan and circulate it for feedback.
I’ve written extensively about opportunities that exist within the niche of venture philanthropy. This is another avenue your organization can consider when thinking about new revenue streams. It takes the right combination of circumstances, but when successful, it provides a sustainable stream of unrestricted revenue.
Diversifying revenue is an organization-wide strategy decision. It needs to involve your board, CEO, and other executive leadership, but great ideas can come from anywhere. If you see an opportunity, do your own research to understand the pros and cons. Put together a thoughtful proposal and share it with your leaders. They will appreciate your big picture thinking and you will be making a valuable contribution that could expand the impact of your mission.
