Many nonprofits learned the importance of revenue diversification the hard way over the past two years. Unexpected reductions, or even elimination, of certain revenue streams had them scrambling to meet increased demand — or simply to stay afloat. This article examines how nonprofits can achieve the greater financial stability that typically comes through diversification of revenue streams. A short sidebar covers a few potential downsides of revenue diversification that each organization must assess to determine whether the benefits outweigh the costs.
The case for multiple streams
Perhaps the most prominent argument in favor of revenue diversification boils down to “hedging your bets.” Your organization could lose a large grant, a recession might dampen individual donations or government funding priorities could shift. But if you have other incoming revenue, it can minimize the disruptions while you look for ways to fill the gap.
Multiple revenue streams also can provide organizations with greater autonomy. If your nonprofit is overly reliant on a single funding source, it may have no choice but to accept certain constraints (for example, donor-imposed restrictions) that come with that funding. And expanding revenue streams can expand your nonprofit’s network of connections. Connecting with a community foundation or major gift donor could give you access to people and entities with similar interests and means.
Additional streams to consider
If your organization determines that diversification is a good strategy (see “Watch your step” below), you have several options, including:
1. Adding new income-generating products or services. Think about service fees or product sales that can generate earned income. One of the easiest solutions is to charge a fee for services you already offer. Say you provide tutoring for low-income students. You could charge students from wealthier families for the same service. You also could offer fee-based lectures or seminars related to your mission, live or online.
Branded merchandise is a common revenue source. The possibilities are wide, from t-shirts, mugs and hats to items buyers can use to actually advance your cause. An environmental organization, for example, might sell reusable hemp bags or water bottles.
Bear in mind that you could end up subject to unrelated business income tax (UBIT) if your new product or service line isn’t substantially related to your tax-exempt purpose. Your CPA can help you factor that into the equation.
2. Broadening your targets for contributions. There’s no overstating the value of individual donors, but organizations can get complacent about their donor base. Don’t just rely on your loyal donors — work to grow your overall donor base. That said, those loyal donors also are potential targets for major gifts. Research your regular supporters to determine if they have the wealth and philanthropic interests to make significant gifts. If so, start paying more attention to nurturing those relationships.
3. Teaming up with corporations. Corporations can shore up your revenues in several ways, from large-scale funding to small, project-based support. You could join forces with a company for a cause-related marketing campaign, with the corporation donating a percentage of the resulting sales. Perhaps a company would agree to a matching program.
Or a corporation could make in-kind donations. And don’t overlook other types of contributions such as corporations that encourage their employees to volunteer.
4. Ramping up your grant applications. Pursuing grants takes time and resources, things some organizations don’t have in excess these days. But, with such an abundance of grants out there, it’s hard to ignore this revenue stream — especially as funders may be relaxing some of their requirements in the wake of the pandemic.
In the survey “Foundations Respond to Crisis: Lasting Change?” recently conducted by the Center for Effective Philanthropy (CEP), foundation leaders signaled that they plan to continue to reduce administrative burdens for grantees, such as grant application and reporting requirements. They also plan to increase unrestricted funding.
Adding one or more revenue streams isn’t an overnight process. It will take planning and preparation. You might, for example, need to establish new accounting processes and controls. In the long run, though, it can prove more than worthwhile. Just make sure you check with your tax advisor about potential UBIT issues.
Watch your step
For all its benefits, revenue diversification isn’t necessarily right for every nonprofit. Potential downsides exist, and each organization must assess whether the benefits outweigh the costs in their circumstances.
For example, it generally takes some time to get a new revenue stream up and running. Is your organization able to weather the associated costs without offsetting revenues? A new revenue stream also may have ongoing administrative costs that may concern some stakeholders who are sensitive to such expenses. Alternatively, keeping a lid on overall administration costs might require diverting resources from other programs or revenue streams.
Additional revenue streams could have the unwanted effect of “crowding out” private donations. Prospective donors who see that your nonprofit has landed new grants or government contracts may feel that their donations might not impact the organization and will instead donate to other groups.