Does Revenue Diversification Actually Work for Nonprofits?
November 10, 2021
Nonprofits are always told to diversify their revenue streams. On its face, this advice makes sense. There’s no question that several sources of income provide better financial security than having a single source.
The question is, can all nonprofits successfully pursue diversification? Some diversification is going to be required if your organization depends on grant funding because funders typically cap the amount of money that can go toward general operating expenses. But what if your organization has successfully relied on donations and fundraisers for many years? Should you attempt to diversify by pursuing grant funding?
And if your organization relies on grant funding, should you pursue individual or corporate donors?
In this post, we’re going to explore these questions.
THE FUNDING MODELS: GRANT FUNDING, FUNDRAISING, AND CORPORATE PARTNERSHIPS
Two of the most popular methods of revenue generation for nonprofits are grant funding and fundraising activities. A third source of revenue, which has been increasing in importance, is private-public partnerships. Below are several of the pros and cons of each source of support.
Relying on Grant Funding
If you rely on grant money alone, your organization will face ebbs and flows in revenue as grants are cyclical. Not only do grant opportunities come in waves, but every grant has a fixed beginning and end, so if you depend on grant funding, you are going to be facing peaks and troughs in terms of your revenue stream.
The other aspect of grant funding that can be challenging for nonprofits is that most grants only cover a small portion of the organization’s unrestricted costs (i.e., its general operating expenses). To generate enough unrestricted funding to cover general operating costs, most nonprofits conduct some kind of fundraising, such as holding fundraising events, soliciting cash donations, or both. Other nonprofits are lucky enough to have an endowment that can be tapped to cover some of their general operating costs.
Generating Funds through Fundraising
Fundraisers such as community events, raffles, and auctions are tried and true methods of raising funds.
Fundraising activities can also include soliciting donations directly from individuals.
Many nonprofits are incredibly successful at raising money through individual donations. The organizations that achieve the greatest success with individual donor campaigns usually have one of the following in their favor: (1) broad name recognition (e.g., the Red Cross), (2) the issue the organization works on has strong emotional appeal (e.g., generating funds for medical research on birth defects), or (3) immediacy of the issue or crisis relief (raising funds for disaster assistance). A fourth factor is where the organization is located. Community organizations located in more affluent communities will generally have better success at generating donations from wealthy individual donors than organizations based in less affluent communities.
Pursuing Public-Private Partnerships
In recent years it has become very popular for large nonprofits to attempt to generate funding and scale their programs by seeking out partnerships with private companies, from the Starbucks and Targets of the world to local businesses.
The idea behind the partnerships is that the nonprofit will gain support—which could be in the form of money, technical assistance, connections, or supplies—while the company receives opportunities to further its corporate social responsibility plan and market itself as a good corporate citizen.
For both the company and the nonprofit, public-private partnerships appear to be a win-win. The downside of these partnerships (mostly on the nonprofit side) is that they can be time consuming and costly to cultivate. One challenge in securing a corporate partnership is the amount of competition among the mid- to large-sized nonprofits to secure partnerships with high-profile multinational companies like Nestlé, Dannon, and Mars.
To advance their interests and court these large corporations, many large nonprofits, especially international nongovernmental organizations (INGOs), have hired individuals from the corporate sector to foster relationships with private companies.
IF YOU ARE SUCCESSFUL WITH ONE FORM OF REVENUE GENERATION, CAN YOU SUCCESSFULLY EXPAND TO OTHERS?
If your organization has been largely successful at meeting its financial needs through one method of revenue generation, what should you do if you want to increase your revenue? Should you put more effort into the method that has worked for you to date, or, should you pursue a new form of revenue?
The answer is not clear cut and depends on several factors, including many of the same factors that have made your organization more or less successful with your current income stream.
Let’s assess some of the options:
Fundraising plus grants
Grants plus fundraising
Grants plus corporate partnerships
Fundraising plus partnerships
Adding Grants to a Fundraising-Focused Organization
If your organization has generated most or all of its operating budget from fundraising events and soliciting cash donations from individuals, should you branch out to pursue grant funding? Grant funding could be a good direction for your organization. However, you’ll want to factor in the following:
Grant research. Finding the right grant opportunities to apply for takes time. It also takes resources. If you are serious about finding funding opportunities, you really need access to a funder database. The cost of databases varies, but you should be prepared to spend several hundred dollars a year at a minimum for a database subscription.
Grant writing. Strong grant proposals are well written and reflect an understanding of the funder’s interests. Someone who writes well can be a good grant writer with practice, and someone with not-so-great writing skills—but who is very knowledgeable about the proposed project—can become a better writer. It’s doable to produce grant proposals if you have access to people who fit either of these descriptions: strong writing skills or a strong knowledge base. However, it can take time for them to master the art of grant writing. If you want to jump start your grant seeking, you may want to consider hiring a grant writer. If you hire a grant writer, you need to be prepared for the costs, which can be steep depending on where you are located. In the United States, grant writers charge anywhere from $25 to $100+ an hour, which can quickly add up given that the average proposal can take 20 hours to produce.
Another factor to consider is that you will need to pay the grant writer for their work before you know the outcome of the proposal. Related to this, grants cannot cover costs accrued prior to the award, so you cannot promise the grant writer that they will receive a percentage of any grants awarded as a result of their proposal writing.
Grant management. If you win a grant, you may need to introduce new financial and reporting systems to your organization. Grant-making entities like foundations and government agencies require regular reporting on the progress of the work covered by the grant as well as financial reports. Depending on the funder, you may be required to submit reports anywhere from quarterly to annually. If you are not accustomed to this level of reporting, and especially if you suddenly have several grants requiring management, you may need to hire dedicated staff to oversee them. If you hire a grants administrator for your organization, you need to be aware that these positions must be paid for by unrestricted funding. That is, organizations usually cannot cover administrative positions through grant funding because the position is operational in nature and not tied to a specific project.
If you’re thinking of exploring grant funding, you will also want to consider the number of relevant grant opportunities for an organization like yours. Grant opportunities are not evenly distributed across all issues and geographic areas. You’ll need to determine how many grant opportunities exist for organizations where you are based and with similar missions.. You may not have a good sense of this until you do some preliminary research, so the first step is to engage in prospect research. Prospect research is the term used for researching potential funders using tools like a funder database.
Additionally, as mentioned earlier, grants are not a good option for generating unrestricted funding. If you wish to generate more revenue to cover your general operating costs, grants may not be the best means of diversification.
Is Grant Funding Going to Be an Option for You?
It can be a good move to add grants to your organization’s list of potential revenue sources. However, you must have cash reserves to cover the costs of pursuing grant funding, as you will need to pay the grant writer with unrestricted funds, sometimes paying up to half the expected amount to retain the grant writer with the remainder due upon completion of the proposal. Second, your organization needs to be based in a geographic location and focused on issues of interest to grantmakers. If you can find only one foundation that looks like a fit for your organization, grant funding is probably not going to be a good option for you to pursue.
PURSUING FUNDRAISING IF YOU ARE A GRANT-FOCUSED ORGANIZATION
If your organization has relied primarily on grant funding, you’ve probably experienced the peaks and troughs of grant revenue. When grant money comes in, you hire staff, start projects, and expand programs. When grants end or grant resources dry up, you lay off staff, end projects, and scale back or cancel programs.
Additionally, if the majority of your funding comes from grants, you’ve probably run into the issue of many funders either not covering unrestricted costs at all, or only permitting low overhead rates. Without unrestricted sources of funding, you cannot cover your executive director’s salary, the salaries of your administrative staff (which includes grant writers), or ongoing costs like rent and utilities for your office.
If you have a number of active grants, you might be able to cover your unrestricted costs if each of your awarded grants allows for at least a percentage of the budget to go toward overhead costs. However, if all your grants have low overhead rates (e.g., capped at 10%)—or if several of your grants don’t allow overhead costs at all—then you can quickly run into budget difficulties. If you face an overhead shortfall, you will need to pursue activities like fundraising events or individual donations to generate funds to cover unrestricted costs like your general operating expenses.
The advantage of fundraising is that you have more freedom over how generated funds are spent versus grant money. With grant money, the funder dictates the terms.
The downside of initiating fundraising campaigns for a grant-focused organization is that fundraising requires a different set of skills than pursuing grants, so an organization may need to hire new staff or build a cadre of volunteers to assist with the fundraising. Generally, grant seekers and writers tend to be more introverted whereas fundraisers tend to be more extroverted, outgoing personalities. These differences in work style may partly explain why, in larger organizations, it is common to see resource development split into two offices, with one office dedicated to fundraising and the second dedicated to the pursuit of grants.
Another cost to be aware of related to fundraising is legal fees. Fundraising activities and events must comply with local laws and carry adequate liability insurance.
Is Fundraising an Option for You?
Fundraising events can be a good option for your organization if your organization needs unrestricted funds and has the capacity to oversee the campaign and the resources to cover associated costs.
What about Soliciting Donations from Individuals?
Soliciting donations from individuals, either on a one-time or recurring basis, is another fundraising option. Similar to holding fundraising events, the people who are most comfortable soliciting donations from individuals tend to be different personality types than your typical grant writer. This means you may need to hire new staff if you decide to approach individuals for cash donations.
A second factor to consider related to asking for cash donations is that it’s not something that will work for every issue or in every community. Some issues are going to lend themselves more to this type of fundraising than others.
For example, if your organization provides a tangible community service, you may be able to generate widespread community support because community members can see, and maybe even directly benefit from, the results of your work. If your organization works on an issue that resonates emotionally with potential donors, that’s also a strong sign that an individual donor campaign could work for you.
Asking individuals for money will be a harder task if you have difficulty showing the impact of your work. If you struggle to articulate what you’ve accomplished, if you can’t provide a clear vision of how your work is making a difference, it’s going to be challenging to get individuals to donate money.
Even when you can easily demonstrate the value of your work, it can be difficult to convince an individual donor that their modest cash donation will make a difference to your organization. This is particularly true if your organization appears to be well funded by grants and other funding sources. So it’s a balancing act. To make individual donations a consistent income stream, you must be able to show your organization’s accomplishments and how small cash donations make those accomplishments possible.
ADDING PARTNERSHIPS TO GRANT- AND FUNDRAISING-DEPENDENT ORGANIZATIONS
The final area to consider is corporate partnerships. Corporate partnerships take various forms. As part of its corporate responsibility initiatives, a company could underwrite a nonprofit’s annual fundraising event.
Companies can also provide direct funding to organizations that have been nominated by their board members, employees, or through a formal application process similar to what foundations traditionally use.
In other cases, corporations will partner with the nonprofits to conduct project activities, sometimes providing technical assistance by placing one of their employees with the nonprofit through a secondment. If the corporation joins a nonprofit on a grant that requires matching funds (also referred to as cost share), the company may promise in-kind match for the project in the form of equipment, materials, and technical assistance. For example, salaries of corporate employees seconded to the nonprofit will continue to be paid for by the corporation, and the amount of the employee’s total compensation package can be leveraged as cost share.
Can Corporate Partnerships Benefit Your Organization?
Regardless of whether your organization primarily depends on grants or traditional fundraising, the right corporate partnerships can bring significant rewards.
If your organization depends on grants, having a company join you as a partner on a grant application can increase the competitiveness of your grant. The funder may view the expertise and material resources a corporate partner can bring as strong evidence that the project will be capable of achieving the target outcomes. Additionally, regardless of whether a funder requires cost share, common wisdom is that being able to offer matching funds is going to make a grant proposal more competitive. If a funder has to choose between two comparable grant applications, one with matching funds and one without, the application with matching funds will probably be the winner.
If your organization depends primarily on fundraising events, partnering with one or more companies can help publicize the event and underwrite its costs. If you depend on individual donations, you can also receive benefits from corporations as a byproduct of your work: Many companies match their employees’ donations to nonprofits, so if you know an individual donor works for a company that offers matching funds, your organization may be able to receive double the money from a single ask.
Like all the other options for generating revenue, securing corporate partners as event or project partners takes time and resources. Once you have connected with a company, the relationship may last many years, requiring upkeep in the form of ongoing communication but not extensive or costly outreach efforts. Establishing the relationship, however, can be expensive, primarily in the form of staff time.
Small nonprofits often have their executive director do most of the legwork to pursue corporate partners, which can be an affordable route. For larger nonprofits, and particularly international nongovernmental organizations pursuing multinational companies, the CEO of the organization can play a role in the corporate outreach, but there may be a need to hire someone to work on private partnerships.
Regardless of the approach, trying to secure a corporate partner is not going to be cheap. If an organization chooses to hire someone from the corporate sector to lead their public-private partnership initiative, they will need to offer a salary that will be acceptable to someone from the private sector. While this investment in human resources can pay off, it can take many years before it does so, resulting in the organization potentially paying more in salary and benefits for the public-private partnership position than it recoups in the form of corporate partnerships.
The bottom line? Corporate partnerships are great to have, but they carry risks and can be expensive to pursue.
Before your organization decides to pursue private partnerships, it should assess its risk tolerance. There is no guarantee that pursuing a corporate partner will lead to a partnership, so the opportunity costs can be high. Second, your organization will need discretionary (i.e., unrestricted) funds to pay for the research and cultivation of corporate partners, whether that is accomplished through a contract with a consulting firm or an in-house position.
CONCLUSION
Should you diversify your revenue? Yes, as much as you can, you should attempt to diversify your funding sources.
Are all options for diversification equal? No.
For each organization, depending on its mission, structure, resources, community ties, and the number of competing nonprofits, one source of revenue generation is probably going to emerge as the strongest and primary source of funding. A second revenue-generating option may emerge as a complementary source of funding. However, all other funding options may not be realistic, either because of the costs and resources required to pursue them or there is a poor match between the funding method with the organization’s mission.
So, the question is not whether you should diversify, it’s what type of diversification will work best for your organization. You need to employ options where the benefits gained outweigh the costs of pursuit. Should you hold fundraising events, solicit donations from wealthy individuals, write grant proposals, or pursue partnerships? One—and sometimes, all—of these options can work for an organization. However, all the options require planning and resources to put into place.
