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  • Writer's pictureAlison Finstad

How to Diversify Your Income Sources in Four Easy Steps

A diversified array of income sources shields your nonprofit against recessions, pandemics, and the normal fluctuations of donated funds.



In 2021, I received a call from a nonprofit leader who was in desperate straits. The majority of the organization’s income – 94% to be exact – had been earned year over year through a contract with the county. Because of COVID, the county abruptly discontinued the contract, and the nonprofit was left to flounder.

 

Upon deeper inspection, this nonprofit only had a handful of donors. Not in a database, but on a spreadsheet. And their annual budget was upwards of one million dollars.

 

It was a monumental effort to build the donor base from scratch, seek out new streams of earned income, launch a grants program, and market the organization while keeping all staff employed. We also needed to reevaluate the effectiveness of the board and establish a strategic plan.

 

You can avoid this emergency by diversifying your organization’s revenue sources – not just a wise move, but an essential one.

 

Trending Across the Sector

 

A recent meta-analysis of 40 studies done on nonprofit revenue stream diversification showed a “statistically significant association between revenue diversification and nonprofit financial health.” The downsides of revenue diversification are far less notable than its merits, and it is a necessary process to hedge against financial uncertainty.

 

The pie charts below are hot off the press from CCS Fundraising and The Giving Institute who recently released their report on 2023 giving. They demonstrate the evolution of income sources across the nonprofit sector over the past 40 years. Most notable are the decrease in the proportion of giving from individuals (82% to 67%), and the increase in proportion of giving from foundations (6% to 19%).

You may have more income sources than the charts above, including line items like fees for service, earned income (membership, tuition, social enterprise), endowment interest, etc. Events, appeals, major gifts, and Donor Advised Funds would all be included in “individuals.”


Creating an Income Diversification Plan in Four Easy Steps


It's not too difficult to assess the diversity of your own income sources and create a plan to ensure that your organization is protected against overreliance on any one source. Simply follow these steps:


1) List the sources of income from the past 3-5 years and the average percentage of income each source totaled. A rule of thumb is to prevent any income source from accounting for more than 20% of the total, except for income from individuals. Schools may be an exception to this where tuition will likely account for more than 20% of the total. Consider what similar organizations are doing, and pencil in any new sources of income that you would like to try.


2) Ensure that each income source does not rely too heavily on one or two donors. For instance, if you have a goal of $1M in major gifts, ensure that $900,000 isn’t coming from one donor – or expand your donor base and increase your goal!


3) Consider the return on investment of each income source. It’s important to remember that events (galas, golf tournaments, road races, etc.) consume an extraordinary amount of staff time. If you were to count each staff person’s hourly wage as an expense, you may find that the event does not actually break even – and that does not even include the opportunity cost of working on higher ROI fundraising activities such as major gifts! This article explains when events are a great idea and when they are not advised. Keeping low ROI activities to a minimum and focusing on higher ROI activities will help your organization thrive in the long run.

Activity

Cost per dollar raised

Return on Investment

Major Gifts and Capital Campaigns

$0.05-$0.10

High

Grantwriting, Direct Mail (renewal), and Planned Giving

$0.20-$0.25

Medium

Acquisition Mailings and Special Events

$0.50-$1.25

Low

4) List the ways that each slice of the pie will be executed. For instance, if your goal is $1M in grants, which grantmakers will you apply to and for how much? If your goal is $5M in individual gifts, who is in your donor pyramid and what do you estimate they will give?

 

Conclusion

 

Diversification of revenue sources is not a once-and-done activity, but one that should be done each year, preferably during the budgeting process. It’s not a luxury, but an essential activity for each nonprofit to undertake to protect itself against vulnerability and maximize opportunities for the future.

 

If you need help with diversifying revenue sources, Benezet Advisors is #HereForYou! Contact us today.

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