Nonprofit Funding Matters: Revenue Diversification: Think Like a Growing Business

August 6, 2015

Many nonprofit organizations are quick to celebrate short term funding successes without exercising the proper degree of caution about the sustainability of those sources.  In a growing for-profit business, management is constantly expanding its product offerings, adding sales and marketing infrastructure, and looking for ways to increase revenue from existing sources, while at the same time seeking new customers. Nonprofits need to think the same way!

Ultimately, broadly diversified revenue streams mitigate the risk of diminished support from legacy sources. For example, if government funding is curtailed or eliminated for certain programs, a nonprofit may need to develop a philanthropic support base.  Similarly, if corporate donations dwindle, as they may for many underlying economic reasons, a dedicated and supportive individual donor base may be activated.  The list of comparable scenarios is nearly limitless.

Forward-thinking nonprofits diversify revenue by creating a variety of resource streams, including:

  • National and local foundations that are mission-aligned;
  • Family foundations with members who are interested in the nonprofit’s work;
  • Businesses who understand the vision or whose key leaders may be involved on a nonprofit board;
  • Individual donors who have been touched by the work of the nonprofit;
  • And my favorite, earned income.

Internal Infrastructure for Revenue Generation
Many nonprofits create their internal management positions and systems with the primary thought of the services they are delivering, which is important for the nonprofit to successfully serve its mission and its clients. But if the infrastructure doesn’t also support the activities that create revenue, the organization will simply not succeed. Using the for-profit business analogy, can you imagine a successful and growth-oriented business not considering its sales and marketing departments as a high priority?

If grants and philanthropy are the most important revenues sources, then a nonprofit needs a development department of employees skilled in both fundraising and friend-raising. Professional grant writers, both for sourcing and creating proposals for funding can be essential.

Finding the Right Balance
When it comes to funding sources, there is no golden egg; each revenue stream comes with its own idiosyncrasies. Yet, even if your organization does rely on a single source for the bulk of its funding, it’s important not to rely on one single payer.

For example, if 90 percent of your funding comes from state government sources (think Medicaid for safety net healthcare organizations), you can minimize that risk by looking for specific governmental programs that may supplement the diminishing formulaic reimbursement models. Or look to add programs that leverage the infrastructure of the organization but rely on other (more robust and reliable) payors or reimbursement sources.

Your goal should be to establish a base of funding that’s reliable, flexible and varied. Consider conducting a funding review. Start by establishing a baseline with a review of your organization’s funding sources. Such a review should include:

  • Your current funding mix;
  • Restrictions or conditions placed on each funding source;
  • Longevity and predictability of each funding source;
  • Current funding gaps; and
  • Potential future gaps.

Establish benchmarks to see how your revenue mix stacks up against various peer groups — and identify any dangers. As part of your organization’s annual audit process, discuss with your CPA the need to evaluate your revenue sources and identify any areas where you may be too dependent on a single source.

Mission-Aligned Funding
Funders’ interests often fall into distinct categories. The key is to find these natural matches between your mission and particular funding sources. For example, corporations tend to support hunger and health issues while individuals tend to give to issues that cross socio-economic boundaries, like environmental advocacy. Ultimately, they all give to organizations that have clear, compelling and simple messages.

Nonprofits Can Profit, Too
Consider developing alternative revenue streams that are not dependent on the vagaries of state and federal funding or the whims of donors. Management and board members have many talents that can be focused on creating profitable activities. Also, don’t ignore that most nonprofits have strong “brand names” so that can be carefully associated with activities that generate revenue.

Examples are easy to find, but not necessarily simple to emulate. Careful planning is necessary before launching into new business models. Nonetheless, I have observed that talented management and board members have created some of the following VERY SUCCESFUL nonprofit models:

  • Healthcare organizations have developed therapy services for private pay and insurance reimbursements at levels that significantly exceed government program allotments.
  • Agencies that train disadvantaged or challenged individuals so that they can productively enter the workforce developed revenue-based contracts with businesses in exchange for providing productive employees.
  • Long-term healthcare organizations leverage their expertise to create other housing and residential models. Independent and assisting living residences, concierge services, specialty rehabilitation facilities and the like can be structured to provide significant ancillary revenue.
  • Arts and cultural organizations use their facilities and talent to produce rental income, royalties and consulting revenue. Several hugely successful examples exist where contiguous real estate operations have enhanced the revenue picture, because the nonprofit was already managing its own properties. So why not take on more?

As a CPA, I should note that some sources of alternative revenue may be considered Unrelated Business Taxable Income (UBTI). The situation occurs when the earned income comes from a source that is not substantially related to your organization’s tax-exempt purpose. Of course, careful planning could potentially avoid and/or minimize this tax. To be clear, there is nothing wrong with a tax-exempt organization earning UBTI, and the tax only becomes a cost of doing business.

Get Your Board Onboard
Revenue diversification requires a long-term strategy that includes planning, ongoing cultivation and plenty of patience. Make sure your board and leadership understand the importance of revenue diversification – and embrace the need to seek out new sources and combinations of funding. All levels of leadership must consider development and fundraising to be an essential function of their job description.

If you would like to discuss alternative funding sources for your nonprofit, please contact me.

About the Authors

Keith J. Libman
Keith J. Libman
CPA
Partner, Assurance and Advisory

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