In the old nonprofit days, there was a lot of talk about income diversification. Many paid tribute to it. The reasoning is sound. By not allowing any revenue stream to account for more than approximately 20% of your income, you helped ensure budgetary safety.
I’m here to tell you that it still makes sense. But if you choose to mix things up, you need to do it carefully. Here’s why your social sector organization should consider diversification:
- The markets and market volatility affect corporate foundation giving.
- When the economy contracts investments suffer. Corporate, foundation and individuals assets are less valuable and giving decreases.
- After the Great Recession, foundations have tightened up their guidelines. There’s a trend to give more money to fewer organizations.
- Foundations may give for a number of years. However, they’re interested in sustainability. Rather than increasing giving to an organization, they will decrease it in time and move on.
- The inevitable global crisis will come along, which will affect giving.
- Public trust in nonprofits and how they manage money is not as high as you’d think. As more social enterprises and businesses step in to make social impact, distrust can affect giving. Want to know more about this, click here.
There’s another path rather diversification. And, there are good reasons to consider it for your social sector organization. Since the landmark 2003 study from The Bridgespan Study, Funding: Patterns and Guideposts in the Nonprofit Sector, we know nonprofits have to consider their funding model. The study only focused on youth services and environmental advocacy. This was a limited view of the nonprofit sector. More research needs to be done. But, we know not all nonprofit organizations succeed with revenue diversification. Some of the reasons are as follows:
- The largest organization relied only a single type of funding for a majority of their funds.
- Growth to a large scale in youth services and the environment are “extremely rare”. The largest organizations take up most of the funding oxygen.
- At varying budget sizes, we have evidence that different economic models work.
- We also learned that different types of organizations fared better (or worse) depending on whether or not they diversified. For example, the most successful environmental groups moved to diversified income streams at the $3 million mark. In contrast, educational groups have the most success going after multiple sources of revenue up to that same $3 million point.
There is still more work to do. But we’ve come to learn since that study that the most successful organizations became experts in a particular income stream. They also built the kind of infrastructure necessary to support that type of fundraising. In other words, you’re not going to hire a major gift officer if what you really need is a grant-writer.
At the end of the day, it may very well make sense to focus on one or two income streams. It might be a wise investment to build your fundraising efforts around this type of development effort. However, always be mindful and keep an eye on it. You don’t want to get caught in the midst of another global recession with all your eggs in one basket.
© 2015 Wayne Elsey and Not Your Father’s Charity. All Rights Reserved.