One of the undeniable lessons of the past 20 years for nonprofits has been the importance of maintaining multiple revenue streams. Whether dealing with the Great Recession, the COVID-19 pandemic or the loss of some federal funds, nonprofits that aren’t overly reliant on a single revenue stream usually are best positioned to weather the storm.
Generally, no single revenue source should account for more than one-quarter of your nonprofit organization’s budget — and some argue the budgetary limit for a single source of revenue should be 20%. If you’re looking to establish additional revenue streams for your nonprofit, here are a few potential options.
Generate earned income
Many nonprofits can earn revenue by selling products and services, and the possibilities are probably more numerous than you might immediately think. You could, for example, charge fees for services you already provide. For example, if you tutor low-income children, you could sell those services to families who can afford to pay. Or you could offer online webinars or in-person classes, and charge fees to attend.
Branded merchandise is another avenue. By setting up sales via an online store, you’ll also obtain customer data that may be useful in soliciting donations at a later date. Be aware, however, of the possibility that donors might decide that their usual $100 donation isn’t necessary because they already bought a $25 T-shirt. Also consider how you can use your existing assets to earn revenue. This might involve leasing space in your facility or renting out vehicles.
With any new revenue-generating endeavor, be mindful of the risk of incurring unrelated business income tax. To avoid becoming liable for the tax, ensure that your earned income is substantially related to your tax-exempt purpose.
Think bigger with your donor base
Regular donors are wonderful — it’s a luxury to have a group of donors you know will donate every year without requiring a lot of care and feeding. But, with some extra attention, you might be able to make them “major donors.”
For large organizations, the term “major donor” probably brings to mind someone who can give a gift in the millions. A major donor for a smaller nonprofit, though, might be someone willing to make a more modest, yet still significant, donation — for example, $10,000. Do research on your regular donors to see if they might have the resources and philanthropic inclinations to make larger gifts, and work to build relationships with those who do.
Regular donors who aren’t good candidates for major gifts may nonetheless be receptive to becoming monthly givers. A monthly giving program can help your organization survive the slower fundraising periods throughout the year and make it easier to budget and plan. Plus, according to Giving USA, the donor retention rate for recurring donors is 77%, versus 34% for nonrecurring donors. And half of recurring donors give additional gifts on top of their recurring contributions.
Team up with sponsors on events
Live events have long proven their value when it comes to fundraising, in both the short and long terms. An event generates immediate revenue, while also developing or reinforcing relationships with new and repeat attendees. With limited resources, though, the upfront costs may be daunting, if not prohibitive, for some nonprofits.
Corporate sponsorships can make live events more feasible — and profitable. For what may seem like a small contribution to the company (especially in light of the potential tax perks), the company can have its name and logo emblazoned across banners, programs, branded merchandise and marketing materials. A sponsoring corporation is likely to gain exposure to every attendee, as well as those targeted in the marketing campaign.
And the collaboration doesn’t have to end with the event. Encourage corporate supporters to also make in-kind donations, hold employee volunteering days and establish donation matching programs.
Patience can pay off
Developing sustainable revenue streams isn’t an overnight process. It takes time to get new streams up and running and initially, they’ll incur costs without the offsetting revenues. Reach out to your Hood & Strong advisors for guidance. We can help you run the numbers to choose the right streams for your circumstances and monitor their performance going forward.
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Sidebar: 3 Critical Steps to Successfully Diversify Your Revenue
The following steps can increase your likelihood of success when adding revenue streams:
1. Convince your board. If your board of directors is resistant to the expenditure of time and money to add a new income stream, use a pie chart to illustrate each current revenue source as a percentage of total revenue. From there, review future expected expenses compared to projected revenues — with and without the current streams. If you lose that big grant, will you have the funds to support existing or new programs? Such risk can motivate many board members.
2. Determine appropriate streams. Once you’ve secured board approval, weigh the pros and cons of a range of options, including the implications for staffing and other resources and unrelated business income taxes. And don’t forget your mission. A sponsorship from a corporation that engages in practices contrary to the mission probably isn’t advisable, for example.
3. Develop discrete plans. If your nonprofit has decided to add multiple streams, develop a separate plan for each. Plans should include budgets, timelines and milestones for monitoring progress. They also should identify any new systems, procedures or marketing campaigns required.
