What drives your organization’s resource engine? To get to the heart of this question, you’ll need to dive into looking at the revenue sources that support your work. This article will help you analyze your unique mix of revenue sources, identify your strengths, and watch out for potential challenges and areas where you might be able to grow.
Identify your revenue sources
Nonprofits typically rely on a variety of sources for their income or revenue. It can be helpful to consider the big picture of the mix of those revenue sources before diving in deeper. As you skim this list of common revenue sources, ask yourself: Which do you rely on for revenue, and how much do you rely on each as a percentage of your overall revenue?
- Earned income from programs or services
- Grant funding
- Donations of support from individual community members
- Government funding
- Blended revenue sources
It’s important to consider non-revenue sources too, such as the value of volunteer work & contributed in-kind resources. Along with revenue-generating assets such as endowment funds, these play a role in determining what drives your resource engine.
Pro Tip: Stay focused on what you have.
Rather than scrutinizing deficits, try to keep your attention on your assets. The first step is always to identify and assess what you currently have. By going through this exercise, you may discover new opportunities or gaps that will address deficits along the way!
Consider your challenges and focus areas
Each revenue source requires a different set of skills to attract this revenue, as well as a different set of challenges. Review these conventional categories to consider whether the common challenges ring true for you, and what you could focus on to address them. Are there challenges and areas of focus that you have not considered before?
Earned income is revenue generated from the sale of goods, services rendered, or work performed by your nonprofit. When the purchaser receives something of value directly in return for their payment, that is considered earned revenue. For arts organizations, admission to performances or exhibitions are considered earned revenue. Earned income typically accounts for a small share of most nonprofits’ revenue mix.
- Competitive advantage. It’s important to remember that earned revenue opportunities typically come within a competitive environment. If you do not know how to set your organization or its offerings apart, your earned income may suffer.
- Knowledge of the market. Every business, including nonprofits that rely on earned income, needs timely and accurate information about the audience that your programs and services are geared toward. Gaps in this knowledge can be a barrier to revenue growth.
- Changing demand and interests. Not all of your ticket buyers or attendees are superfans that can be relied on to attend every performance or sign up for every program. Individual taste dictates choice, so your programming needs to align with the interests of your target market.
- Visibility with the target market. Tight budgets for advertising and marketing can hinder your organization’s attempts at building awareness of its offerings.
- Pricing and costs. Organizations are sometimes blind to true program costs, and set prices in accordance with direct production costs. Revenue from programs and services cannot always be expected to operate at a net gain, but organizations that set prices too low in relation to true cost need to make up the balance with other types of revenue.
Consider focusing on:
- Excellence in delivery. In the long run, providing high quality programs and services at a fair price is your best assurance of continued success with earned income, especially if you compete against for-profit businesses in your market.
- Reputation. Concentrate on your patrons, customers, and supporters to make sure that your organization is held in high regard. Conduct surveys and engage on social media to show that customer service is a priority.
- Market research. Familiarize yourself with the overall demographic and psychographic characteristics of the people in your service area, not just your target market. Also pay attention to the offerings of similar organizations in your market. This will help you become aware of potential opportunities and sensitize you to potential challenges.
- Responsiveness to change. By planning for, and welcoming, inevitable change to your organization’s offerings and audience, you guard against becoming overlooked or irrelevant.
Contributions from members of the community that you serve that aren’t tied directly to a product or service fall into this category. Generally, individual donors do not receive anything of value directly in return for this type of revenue, though memberships sometimes include benefits that provide value. In these cases, it may be a good idea to allocate membership income between this category and earned income.
- Capacity to develop and maintain relationships. It takes time and energy to build authentic relationships. Typically, a donor’s expectation of that relationship is proportional to the size of their donation, so you need to make sure staff and volunteer resources are allocated appropriately to keep these critical relationships flourishing.
- Knowledge of donors and members. Having a large number of individual donors or members can become difficult if your organization infrastructure is not equipped to deal with it.
- Maintaining data. The information systems that you use to manage the data about donor and prospect activity can be a barrier if it locks you in to inflexible processes. The flow of this crucial data and your staff’s ability to access and maintain it can stand in the way of acquisition or retention of donors or members.
- Reputation and association. Individual donors can be motivated not only by your organization’s reputation, but also by how their reputation is affected by associating themselves with you.
- Visibility. Donors are often bombarded with appeals from nonprofits at certain times of the year, including holidays and the end of the calendar year. Cutting through the noise can be difficult and your organization may be tempted to rely on techniques that are not consistent with your mission or audience.
Consider focusing on:
- Relationship development. Remember that the primary thing driving the support of individual donors and members is their level of involvement and engagement with your organization. Consider your programs, activities, and messages to be opportunities to strengthen relationships as much as raise revenue.
- Volunteers and advocates. Consider the value of in-kind support from people who volunteer their time as advocates, ambassadors, or de facto staff.These individuals not only raise revenue indirectly, but also provide expense relief that stretches revenue.
- Information systems. Invest in technologies that automate and centralize information gathering processes and communication, allowing your staff and volunteers to use their time wisely.
- Communications. Develop a strategy for making effective use of the communications channels available to you, including email, social media, direct mail, phone, and in person communications. Be aware of audience preferences and capabilities, and make sure not to rely too heavily on one or two channels.
- Storytelling. Individual or community donors want to feel like their contributions make it possible for you to do the work you do. Telling the story of that work, and the impact or change it makes, is critical to reinforcing that feeling.
- Regular marketing. Make sure to continue to have a variety of touch points with donors and members between appeals and renewal notices. Remind them regularly about their involvement with your organization so that not every message and interaction feels to them like a request for money.
Grants are lump-sum payments, typically from foundations, larger nonprofits, or large for-profit corporations. They are frequently intended to fund specific projects and often require you to apply for the grant and show that the money was used for the purpose it was intended. Though some grants are unrestricted, frequently your organization is required to use the funds in a specific way.
- Relationships. Foundations and grant-making organizations do not always award grants based solely on merit. These organizations are run and administered by individuals who change roles and maintain relationships that could affect your ability to secure funding.
- Community reputation. Your reputation within your community is a key factor that grant-making organizations look at when approving grant requests. Make sure that your relationship with your community is strong, and based on trust and visibility.
- Balancing multiple goals. It’s not uncommon for grantors to balance multiple goals or priorities in a particular cycle. That means that your organization may find itself in a situation where access to funds may be restricted or tight due to circumstances beyond your control.
- Cyclical opportunities. Foundations are known to change giving priorities from time to time, leaving your organization vulnerable.
Consider focusing on:
- Relationship development. Maintain channels of communication with the organizations providing the grants and provide regular updates on your work.
- Community visibility. Strengthen and nurture your relationships within your community, as well as the communities served by the funding organization.
- Innovation and adaptability. Stay fresh with the solutions you offer, and make sure that grant requests and proposals aren’t simply copies of previously approved requests. It’s important to show that the work you do makes progress toward the organization’s goals while also providing innovative programming or services to the community.
- Cash reserves. Because foundations can be fickle, over-reliance on grant funding can be risky. Make sure to maintain adequate cash reserves to keep your operations going in case funding becomes scarce.
Governmental agencies, community-based organizations, and NGOs also provide grants to nonprofit organizations. This type of revenue is similar to grant funding but has some specific characteristics that often influence nonprofits to consider them as a separate type of revenue source.
- Maintaining political relationships. Governmental officials, particularly in elective office, may hold public policy views that run counter to your organization’s mission. This may add a barrier to your ability to create or maintain a relationship with them. Additionally, governmental officials and public service professionals switch jobs and roles, which can make it feel like your organization is constantly reintroducing itself.
- Community reputation. Your reputation within your community is a key contributor to grant-making decisions. Make sure that your relationship with your community is strong, and based on trust and visibility. In addition, being seen as an organization that relies on government support may contribute to the way the community views your organization. Alignment with a particular political faction may also affect community support.
- Slow decision making. Bureaucracies are susceptible to delays in considering, approving, and releasing funds.
- Reporting & compliance. Governments sometimes impose strict accountability requirements that require you to report back on the use of funds. Competitive bidding for scarce or limited funds also can increase the costs of applying for grants.
Consider focusing on:
- Maintaining multiple relationships. Remember that your organization operates within many jurisdictions (including national, regional, state, county, metropolitan area, and city). Building your network at all levels increases your access to potential funding and provides a bridge when officials and public servants switch roles.
- Paying close attention to the authorizing environment. Be aware of changes occurring at different levels of government. Be prepared to shift your focus when you see changes in personnel, scope, or jurisdiction.
- Community visibility. Strengthen and nurture your relationships within your community, as well as the constituents served by the funding organization.
- Careful compliance. Understand the laws, rules, and regulations attached to the grants you are seeking and make sure that you abide by them. This includes being accountable for any specific terms spelled out in grants.
- Cash reserves. Because granting authorities can be fickle, over-reliance on governmental funding can be risky. Make sure to maintain adequate cash reserves to keep your operations going in case funding becomes scarce or is delayed.
Analyze your revenue mix
Typically, organizations can manage only one or two revenue sources really well because juggling multiple revenue sources can be complicated. Understanding and developing strategies to handle the relative reliability and independence of your primary and secondary revenue sources will strengthen your overall resource situation.
Once you have considered the challenges and areas of focus of all of your organization’s revenue sources, it’s time to think about how your unique resource mix factors into the bottom line.
This requires asking more questions of your organization:
Do you feel like your organization relies too heavily on a particular revenue source?
For instance, a performing arts center might expect to generate one half of its annual revenue through earned income – ticket sales, concessions, and merchandise. One quarter may come from grants, while the rest comes from individual donors. Depending on the challenges and focus areas they identified, this center may come to determine that their reliance on earned revenue may not be sustainable.
What is the effect of the revenue mix for your organization?
- Earned income is a very important revenue component for this performing arts center, but means that it faces market demand challenges. They may want to focus more on individual donors to increase that portion of its revenue mix.
- Given the realities of your revenue mix and the strengths of your hedgehog, which areas of focus will you prioritize to manage the challenges you face?
- How do your overall goals affect your revenue mix over the next 3 years?