Remember Trivial Pursuit where players answer trivia questions in categories like Sports or Entertainment to win pieces of red or blue plastic pie? Now think of your nonprofit’s revenue sources and ask yourself “What are my revenue pie pieces?” AND “What is the size of each piece of pie?” Individuals and corporate donations, event net proceeds, foundation and government grants, and earned income, are all types of pieces that can make up your organization’s revenue pie. If one piece is very large and another piece is really small or missing all together, you need to protect the organization by diversifying its revenue sources. If your nonprofit is depending on just a few types of revenue, perhaps you need to think about expanding the sources of your funding.
Earned income for a nonprofit is becoming a new or bigger piece of many nonprofits’ pie. Whether charging for your expertise, selling food at a café, or renting out part of your office space, earned income can be a significant revenue source. Be aware that substantial earned income can risk your tax exempt status as Squar Milner points out in Funding Matters – The Importance of Revenue Diversification.
The correct percentage of revenue from each source differs depending on the organization. The goal is to make the pieces of pie, over time, be as equal as possible. Diversification cannot occur overnight or even in one year, but needs to be pursued through the creation of a Development Plan with goals to increase or decrease particular revenue segments. If an organization is overly dependent on one or more types of revenue, it is at risk if that source fails. We’ve seen this happen with government, corporate, and foundation funding in the last ten years. Event funding is probably the most risky. Volunteer leadership, sponsorships, and weather can affect the attendance and success of events.
When setting goals to diversify your organization’s pieces of pie, think about market share and your competition for funding. In the for-profit world, businesses concentrate on market share daily and are keenly aware of their competitors. In the nonprofit arena, new nonprofits are started each day, creating even more competition for funding. At the same time funders are demanding collaboration to heighten impact and ensure non duplication of services. An interesting article on market share (getting and keeping it) appears in Sales & Business Development.
As 2016 speeds on, take time to make sure your organization is healthy by diversifying revenue. Make certain you have the best mix of revenue and that each slice of your revenue pie is the best size for your sustainability.