Revenue Diversity: Ensuring Reliable Funding for Long Term Viability

NFP organizations of all sizes depend on a stable and forecastable top line, it is the life blood of the organization’s capacity to deliver its mission.  This can be sourced as program revenue-based, as contributions or as a mix of the two. When revenue sources are not diverse, the organization is at risk to be impacted by sudden or long term decreases in revenue.  So, lack of diversity in revenue sources is a red flag that management must address with the help of the Board.

Top line diversity can take several forms, such as contributor type, size and scope of program clients and expected funding timeframe. It is critical to sustainability that the organization determine which funding sources are available to them, match the timeframe of funding when possible and ensure program revenue sources are not themselves concentrated.

Contributor Type

Individuals

  • can be quickest funding source (and can go away just as fast)
  • understand your demographics
  • look for ways to broaden your appeal
  • don’t forget that all fundraising techniques do not work for all type of donors

Other organizations (such as foundations)

  • helpful for longer term recurring support
  • more likely than individuals to have some type of restriction (either of use or indirect cost charging)
  • be aware of how significant contributing organizations are doing financially and strategically
  • Reach out to local schools and colleges for partnerships

For profit organizations (employee matching and stand-alone)

  • find organizations that in some way align to or compliment your service offering
  • look for companies geographically aligned to your service areas
  • don’t hesitate to ask your Board members to get creative with their networks
  • some organizations have matching programs with larger NFP organizations, some will match any documented contribution

Federal government

  • deep pockets that seem to always be under threat
  • can be a very slow process, but can be large dollar and multi-year
  • typically carry a heavy administrative burden
  • ensure that the program is accretive to the organization in some way; this may be financially or by providing contacts, experience, prestige or by opening future opportunities

State and local governments

  • can provide resources with somewhat less administrative burden than federal government
  • timing of state budgets can vary more than federal, so be prepared for timing of funding issues

Looking for creative ways to diversify funding sources is a path to long term viability.

It is a best practice for NFP organizations to diversify contributor types to protect against funding trends that may impact any one of the contributor types.  However, there are other types of revenue source concentration to consider.

Size and Scope of program clients

Organizations with program revenues, such as professional services providing research and engineering capabilities, need to be careful to avoid over concentrating with a small set of client organizations (governments, grant foundations).  This can lead to revenue issues if the funder changes strategic course, finds competing services or experiences their own funding issues. Expanding programs with current clients is typically easier than finding new clients, so organic growth from existing sources seems like a good tactic. To avoid this issue management and Boards should proactively look for ways to diversify.  Solving this problem may require a redirect of business development efforts or may require the formation of an advisory committee or a focused search for new Board members with strong contacts with new potential clients.

Broadening Program Revenues

Another step that may help with an issue of program revenue concentration is developing a new program revenue service offering that aligns with your NFP purpose.  Expanding an existing service in new directions or coming up with a new service can provide your organization with new customers or new programs, however, be careful that the service clearly relates to your organization’s tax exempt purpose or you may find yourself dealing with Unrelated Business Income Tax (UBIT).

Geographic program revenue concentration can represent a long-term risk.  Concentrating program revenue sources geographically increases the risk that a regional impact, such as an economic downturn, or even a weather-related crisis may heavily impact the organization’s operation.

Scale is an ongoing strategic issue.  When an organization is small, new business opportunities are likely smaller in nature.  To maintain healthy growth over time, as the organization’s revenue grows, the size of new client agreements needs to grow as well.  This may mean assessing some opportunities as too small or as too much of an administrative burden to pursue.  Even more challenging, this may mean not renewing some existing client agreements.

Special Funding Timeframes

Special Projects are one time initiatives that are a perfect opportunity for one-time funding. These projects can be capital investments or operational, but are needed on a non-recurring basis.  These projects represent great opportunities for special fundraising campaigns and may also be an excellent opportunity for alternative fundraising techniques, such as crowdfunding.

Surge situations arise when large contributions occur due to some outside event or influence.  In the case of a natural disaster, donations to organizations providing relief hopefully will spike and that additional support will be used to aid in the situation at hand.  However, there are times when surge happens without a specific service-related cause.  For example, the latest US Presidential election and aftermath has resulted in numerous organizations seeing large spikes in donor activity.

While there is not a specific program targeted need (yet), the surge in contributions should be put to good use.  There have been several articles on how to best utilize surge contributions.  I feel that these funds are given from the mindset of a future significant need, perhaps a large cut in government available funding, so the surge should be used strategically to counter that future expected impact.  Setting up some reserves is a good idea, but investing the surge in a program or programs aimed at increasing the long-term viability of the organization is, to me, a better course.

General tips for smaller NFPs

  • Go Local – look for organizations in your service area providing complementary services
  • Partner – consider joint grant applications or fundraising activities
  • Stratify your service offering – look for different grants for multiple parts of your service
  • Search for hot funding areas – add a Science Technology Engineering and Math (STEM) or Cyber component to your service offering
  • Outreach – monitor NFP sites, social media and local networking to look for new sources
  • Restrictions – discuss restrictions with funders, often donors have some flexibility if you ask

Wrap up

Revenue diversity is critical for the long-term viability of any organization.  The reality is that no matter how well things are going, something out of the control of the organization is going to happen eventually. Driving diversity of revenue sources is great way to help the organization prepare for challenges and succeed.  Management and Boards should be discussing revenue diversity on a regular, recurring basis and should act when concentrations start to develop.  Concentrations are typically systemic, so the longer management and Boards take to react, the harder it will be to fix the issue.

Learning is a shared experience, so please share your thoughts on this topic in the comments section. Best regards! –mike

 

In the meantime, please share your thoughts on this topic in the comments section. Best regards! –mike

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