Diversify revenue streams to promote longevity for nonprofit organizations
Join us on a four-part series where we delve into the magic of creative marketing and fundraising strategies! Our aim is to increase donor engagement, funding, and so much more! Get ready to unlock your revenue growth potential while making a difference in the lives of those you serve. In Part 1 of this series, we will uncover unique ways to diversify and thus increase nonprofit revenue streams. Ultimately, these are the fundamentals of long-term financial success for nonprofit organizations. Let's get started!
Section I: Understanding the Nonprofit Revenue Landscape
In the world of nonprofit organizations, the pursuit of purpose and impact is undeniably at the core of every endeavor. However, achieving these goals requires more than just good intentions and heartfelt missions. It demands careful consideration of the nonprofit revenue landscape. In this section, we'll take a closer look at the traditional revenue sources that sustain nonprofits, identify the challenges they face, and explore the need for diversifying revenue streams to achieve financial stability.
Section: I.I: Overview of the Traditional Revenue Sources for Nonprofits
Nonprofits have long relied on a combination of earned income and donations to fund their operations and initiatives. Grants from foundations, government agencies, and corporations are some. There are also donations from individuals, major donors, and corporate partners form the lifeblood of many organizations. Yet revenue in nonprofits over the long-term has become increasingly volatile and unreliable. Over 80% of all nonprofit organizations (NPOs) rely solely on donations as a source of revenue. This means the understanding of funding for the long-term is that more vital.
Additionally, many nonprofits engage in fundraising events, such as galas, auctions, and community campaigns. These events present opportunities to rally support from the broader community and encourage donations. Although this leads to a significant gain in earned income for nonprofits, it also encourages more expenses that are not directly tied to the organization’s mission and rarely yields the returns most nonprofits were initially seeking. (reference to revenue diversity) In fact, “Tinkelman and Mankaney (2007) find that larger, more established organizations with higher administrative costs and fundraising to total cost ratios experience lower donation rates” [Carroll & Stator, 2008].
In other words, the more money going to fundraising efforts that aren’t correlated with the nonprofit mission, the less donations that may appear. Why? Higher, indirect expenses such as fundraising directly cut into the return on investments from grants or donations, which is a direct factor in how grants and donations are distributed. Although fundraising will always be a viable source and won’t deter any current donors, what about for future donors when those donors move on or we experience another economic crisis?
Section I.II: Identifying the Challenges and Limitations of Relying Solely on Grants and Donations
While these sources have been instrumental in sustaining nonprofits, an over-reliance on them may limit a nonprofit's potential for growth and impact.
For example, grants are often project-specific and require rigorous reporting and compliance measures, leaving little room for unrestricted spending. On the other hand, donor generosity can fluctuate due to economic changes, seasonal variations, or other unforeseen circumstances, such as The Great Recession or COVID-19.
This unpredictability can create budgetary uncertainties for nonprofits, impacting their ability to plan and execute long-term strategies effectively. On average, the nonprofits that have the most revenue volatility (think donation reliance) serve the most vulnerable American population needs. “Greater shares of organizations for which donations are essential experienced declines in donations in 2020, placing many of those organizations in a difficult position” [Urban, "Nonprofit Trends and Impacts 2021]. If they were to fail due to not having enough revenue over a long period of time, the problems in the nonprofit sectors, like healthcare and arts for example, would be critical for the very people who need those services most.
This is a dire problem that has an easy solution: revenue diversification.
Section II: Introducing the Need for Diversifying Revenue Streams to Achieve Financial Stability
What is diversified income? Diversified income for nonprofit organizations “consists of relatively equal reliance on revenue generated from donative income, earned income, and investment income.”
So rather than focusing solely on donations, or even donations from one source, revenue can come from more common earned income such as:
- Membership fees and dues (eg the success of every major fraternity and sorority) [Earned income]
- Corporate sponsorships in place of regular fundraising efforts [Earned income]
- Licensing intellectual property, such as logos, songs, or even teaching your methods based on your sector [Earned income]
- Social enterprise initiatives to allow corporations to sell a product for their mission or cause [Earned income]
- Allow donations through investment channels like dividends that would come over the long term [Investment income]
- Converting part of your office into a workspace for the public to use on a weekly or monthly basis [Investment income]
By incorporating a few of these creative solutions, in addition to maintaining and seeking donations, nonprofits can reduce the unpredictability of their future revenue and develop strong, long-term missions for the organization. With a wide variety of sources, this lowers the unpredictability of constant sharp changes, and instead averages out revenue over a period of time. This makes it more adjustable to be altered for things like inflation, economic changes, and more.
Section III: Type of Strategy
Always remember that these sources should be bringing in equal or close to equal revenue to maximize long-term gains for your mission!
Revenue diversification is a long-term strategy where the results of consistent nonprofit revenue streams can lend an ease to planning a long-term mission. Ultimately, diversification leads to greater long-term stability, and “this level of stability may also lead to an increased ability for managers to accurately predict financial margins and consequently engage in more exact strategic planning, as well as expand the length of time covered in a planning cycle" [Carroll & Stator, 2008].
What’s Next?
Understanding the nonprofit revenue landscape is crucial for any nonprofit professional who aims to create a lasting impact and ensure the organization's sustainability. While grants and donations form the foundation, diversifying nonprofit revenue streams pave the way for financial stability over a lifetime for the communities they serve.
In the next section, we will delve deeper into creative revenue generation strategies that will inspire nonprofits to take their financial journey to new heights! Stay tuned.
About ForGranted: ForGranted Media specializes in all facets of emerging technological advancements, finance, fundraising and marketing for your nonprofit. Our sole mission is to provide with resources to become a stronger organization!
About the Writer: Zakiya Moore is a freelance writer from Oakland, California specializing in dance, nonprofit, literature, and culture. She has worked with the American Bar Association, National Black Cultural Information Trust, Woke Dancer, and many other nonprofit organizations and publications!
