What makes a sustainable revenue strategy?
By: Steve Zimmerman, Steve Strang, and Shelly Schnupp
Ask any Executive Director what keeps them up at night and you will most likely hear about raising enough money. For years, if not decades, the leading need identified in polls by nonprofit executives has been increased or sustainable funding. “No money, no mission” has been engrained in the sector, as has the concept of the dual bottom line, which encourages nonprofits to achieve both financial health and impact. Both mantras focus more of leadership’s energy on the financial underpinnings of organizations. Our own work visualizing and strengthening business models using the matrix map tool also reinforces the deep interconnectedness between an organization’s ability to be financially viable and its ability to accomplish its mission. Nonprofit leaders understand from their lived experience: their organizations need a reliable flow of money to fully operate and realize impact.
Unfortunately, this knowledge often manifests itself in searching for revenue by:
- leaning into the fear of missing out by copying successful revenue ideas of neighboring organizations;
- creating a committee of community members to brainstorm new revenue strategies which usually devolves into “who” can give money;
- following the “if you build it they will come strategy,” focusing solely on the mission impact while hoping and praying that money will follow success;
- designing programs that align with the latest funder RFP, no matter its connection to the mission; or
- all of the above.
This “more the merrier,” scattershot approach to revenue hasn’t served organizations well in creating a solid, sustainable financial base from which to build impact. While it may work for start-up organizations, as they mature, growth-oriented organizations focus and typically generate 70 to 90% of their revenue through one stream. [i] They do so through conscious investment of resources into the infrastructure, people, and relationships to do one thing really well and then leverage this expertise in ongoing, creative ways within a funding stream.
To build a sustainable financial base, organizations need to understand and intentionally invest in a revenue strategy that aligns with their mission and considers their community. While the specifics will differ from organization to organization and community to community, the characteristics of this strategy are consistent. It is a revenue mix that will:
- Align with the organization’s impact
- Produce flexible income; and
- Leverage the organization’s capacities.
1. Alignment with Impact
While no one would begrudge an organization a windfall of revenue with which to work, the odds of winning the lottery are long. Instead, organizations must be prepared to consistently generate revenue.[ii] The likelihood of revenue being reliable is increased when there is alignment between the revenue stream and the organization’s impact.
Nonprofit scholar Dennis Young addressed this connection in his Normative Theory of Nonprofit Finance, more commonly known as benefits theory. He writes “sources of income should correspond with the nature of benefits conferred on, or of interest to, the providers of those resources.” He explains how each revenue stream has its place in support of different missions and services, but the appropriate mix is dependent on how best to connect beneficiaries to the organization’s work.[iii]
Utilizing the mission statement or the more specific statement of intended impact, the organization can analyze how various audiences benefit from its efforts and invest in revenue streams that attract those who value the organization’s impact. This reinforcing cycle where the organization’s impact is used to generate revenue which, in turn, is used to generate more impact helps increase the ability to sustain the revenue as well. Beyond simply providing much needed resources for the mission, the cycle also elevates the importance of the nonprofit’s work through increased awareness, aligns the work directly with the interests of donors or customers, and strengthens funders’ relationships with and connections to the mission. As a result, and assuming that the organization continues to deliver strong outcomes, donors or customers continue to care or benefit from these outcomes, and the organization invests in these funding partnerships, this approach helps strengthen the reliability of its revenue mix.
2. Produces Flexible Income
Nonprofit organizations are different from for-profit companies in that not all revenue streams have similar characteristics. For an organization to be resilient and weather challenging times it needs to build reserves, like any business or household. However, some revenue streams with donor restrictions imposed by individuals, foundations, government agencies or other institutions don’t allow this. Rather, they require all funds earned to be spent in a certain way, leaving no surplus for a reserve. Therefore, to create a sustainable revenue mix, leadership needs to consider not only how to secure funding for the organization, but also the flexibility[iv] – the degree of freedom the organization has to spend the money or make strategic funding choices like building a reserve.
Many funders, but most typically government agencies, don’t cover the fully allocated, true costs of operations. Therefore, organizations must rely on philanthropic donations or earned revenue surpluses to subsidize their mission-critical but underfunded efforts. For example, a government contract may not cover the full costs of operating a domestic violence shelter. Organizations may fill the funding gaps by raising additional support from generous individuals and local foundations.
This inflexibility does not mean that revenue streams with restrictions are inherently “bad.” Quite the opposite. With proper accounting and an enlightened funder, restricted funds can be an excellent source to cover the full true costs of operations. However, while advances continue to be made with an increasing number of foundation funders pledging to cover full costs, for many nonprofits it is still not their reality. Rather, they need to supplement restricted funds with unrestricted dollars to maintain impact and financial viability.
Unrestricted dollars provide a level of flexibility to leadership to use the money where they see the strongest need. This may include subsidizing high impact programs, building a reserve to strengthen long-term financial health or using funds as seed capital for innovative new programs. It also allows for adaptability to respond to the needs of the community as the economy or constituent needs change. Because of the importance of advancing the mission and creating stability for the organization, the ability of a revenue strategy to produce flexible income is essential.
3. Leverages the Organization’s Capacities
Even after identifying flexible revenue streams that are aligned with impact, without the capacities necessary to bring the revenue in, the organization won’t succeed. Therefore, organizations seeking to be strategic about which revenue strategies they implement will evaluate the possibilities through the capacities lens to determine where to commit limited time and resources. Each revenue stream is a different line of business, with its own capacities, encompassing skill, infrastructure and relationship requirements. While there is overlap among the capacities associated with different streams, there is enough difference that specializing and investing in specific streams allows the organization to develop a deep expertise and increase the likelihood of building a sustainable revenue strategy.
This concept is easy to understand when looking at mission-specific programs but is often lost when it comes to analyzing the capacity needs for revenue streams. In the same way that running a summer camp requires different capacities than delivering job training services, so too does generating income from individuals require different capacities than doing so through government channels. For example, individual donations require the time to properly cultivate and steward donors as well as a systematic method of connecting with the community, whereas government contracts require a strong accounting system to track expenses and a method of reporting the impact of programs. (Many of the different capacities required for each revenue stream were covered in The Nonprofit Quarterly’s “Mastering the Nonprofit Business Model” series).
That nonprofit revenue streams require unique capacities for success underscores the challenges associated with diversifying by simply adding revenue streams. Though it may sound easy and ideal to generate revenue from government grants, individuals, and fee-for-service, the reality is that doing so can be overwhelming, especially for smaller organizations. To implement a strategy with such different revenue streams requires vastly different staff expertise, technology tools, and sector connections. All of that requires investments of time and money to set up, monitor, and grow. As one study summarizes, “A nonprofit with a concentrated revenue portfolio can streamline its spending and maximize the resources it passes to programs. In contrast, diversification requires specializations and different administrative apparatuses across the various approaches.”[v]
Importantly, considering capacities does not necessarily mean that organizations should only pursue those revenue streams in which they are currently strong. Today’s strengths may not be sustainable as changes in the funding community or other external factors may impact viable revenue strategies. Leadership needs to assess the market and the risk of changes while still identifying a primary revenue stream to pursue and then invest in the capacities necessary to generate reliable and flexible revenue.
Making Investments in Revenue Strategy
Given the pressing nature of bringing money into an organization and the fear and awkwardness associated with talking about finances, it is easy to understand how revenue conversations quickly devolve into a brainstorming exercise of wealthy donors, foundations, and corporations. However, this approach is no more beneficial for the long-term health of an organization than a band-aid is for a broken leg. Rather, a cogent revenue strategy requires intentional planning to align streams with the organization’s impact, produce flexible income and leverage the organization’s capacities.
Investing in the implementation of that strategy is also essential. It requires time from the board and staff to think deeply about the revenue mix, to balance competing demands and, ultimately, to make informed, often difficult decisions about where to allocate resources. It often means saying no to something you’re currently engaged in, or shifting priorities to devote the necessary human and financial capital to build and remain committed to the strategic direction. It often demands patience, as building capacity and seeing revenue-generating results can take years. Unfortunately, wishful thinking alone does not result in growing revenue.
Making these investments is hard. It feels risky and uncomfortable. That is OK. Organizational strategist Roger Martin observes the inherent discomfort of creating strategy:
If you are entirely comfortable with your strategy, there’s a strong chance it isn’t very good…You need to be uncomfortable and apprehensive: True strategy is about placing bets and making hard choices. The objective is not to eliminate risk but to increase the odds of success.[vi]
Building a revenue strategy that possess the characteristics explained above lays the foundation for continued success, impact and, ultimately, positive community change.
***
Stay connected with us over the next few months to learn more about how to implement our approach in your organization. Insights and templates are available on our website today.
[i] Kim, P., Tollerud, S., and Perreault G. (2018). From Small to Scale. The Nonprofit Quarterly. https://nonprofitquarterly.org/2018/05/01/three-trade-offs-smaller-nonprofits/. | Foster, W. and Fine, G.(2007). How Nonprofits Get Really Big. Stanford Social Innovation Review. https://ssir.org/articles/entry/how_nonprofits_get_really_big .
[ii] For more on the variables involved in nonprofit revenue (reliability and autonomy, what we call flexibility) see: Pratt, J. (2004). Analyzing the Dynamics of Funding: Reliability and Autonomy. The Nonprofit Quarterly. https://nonprofitquarterly.org/analyzing-the-dynamics-of-funding-reliability-and-autonomy/.
[iii] Young, D. (2007). Toward a Normative Theory of Finance. In D. Young (Ed.), Financing Nonprofits: Putting Theory Into Practice (339-372). Lanham: AltaMira Press.
[iv] Pratt, J. (2004).
[v] Hager, M. and Hung, C. (2019). Is Diversification of Revenue Good for Nonprofit Financial Health? The Nonprofit Quarterly. https://nonprofitquarterly.org/is-diversification-of-revenue-good-for-nonprofit-financial-health/.
[vi] Martin, R. (2014). The Big Lie of Strategic Planning. Harvard Business Review. https://hbr.org/2014/01/the-big-lie-of-strategic-planning.