As nonprofit leaders, we’re paranoid that our funding will suddenly dissipate. We obsess about the grants that won’t fund and the donors that will move away.

The bread-and-butter funding that enables our work may dissipate due to any number of external factors. An election cycle, a bad day for the stock market, a poorly attended gala, and even an extended vacation by a wealthy donor can raise our blood pressure and force programmatic cutbacks.

So why do we think we’re different from anyone else?

Most families and businesses are one bad month away from crisis. Nonprofits are no exception. The difference is that nonprofits have learned the incorrect lesson that more money is always available so long as we do more fundraisers. Nonprofits have learned to diversify revenue largely as a response to mid-20th century funding patterns. Our paranoia about losing our funding has led us down a bad path toward over-diversification as a fiscal strategy.

Herein lies the problem. Diversification is not a strategy - it’s an investment. And investments are risks.

Revenue diversification is just not affordable for every organization. In theory, an organization can resist economic shocks by spreading out its income sources from a mixture of grants, donations, fees, corporate gifts, social enterprise, and special events.

Most nonprofits can’t manage all those different funding sources. When nonprofits attempt to manage more revenue streams than they have staff, the revenue streams become unstable and ineffective. And when low-staffed nonprofits over-diversify their revenue, they overextend themselves and create fiscal instability.

If revenue diversification creates long term stability but also creates short term instability, how can nonprofits strategically diversify revenue?

Strategic revenue diversification considers when an organization should start diversifying revenue instead of how to diversify revenue. Organizations should not diversify their revenue until their stable revenue streams produce a surplus, at which point the nonprofit must consider diversification as an investment that carries risk. Nonprofits can strategically diversify revenue by waiting until they are prepared to diversify revenue. Until then, do a few things and do them well. Strategy involves action and patience.

Recommendations for Nonprofit Leaders:

• Diversify when stable revenue generates a surplus
• Staff all revenue streams with enough qualified people
• Consolidate revenue when the nonprofit is small to focus on programming; diversify when the nonprofit is large and can absorb a loss
• Prepare for the costs and risks of diversification
• Invest in the most productive revenue streams and let go of the rest

Andrew Carnegie, one titan founder of private philanthropy, saw the merits of undiversified revenue, stating “The way to become rich is to put all your eggs in one basket and then watch the basket.”

Revenue diversification is still important. Nonprofit organizations should not swing the pendulum back to the 1980s and subsist on government contracts or one funder’s good graces, nor should they swing to the 1990s and 2000s and disregard their mission to build fiscal stability. Instead, nonprofit organizations should accept the known fact that all small businesses and young nonprofits have limitations. All projects are fragile and vulnerable when they first begin. Guarding against vulnerability is not a strategy to achieve a nonprofit’s mission. Vulnerability is inevitable. Nonprofit organizations should accept their vulnerability in their beginnings and work to make themselves irreplaceable and indispensable in the social sector.

Sources:

Bowman, W. (2011). “Financial Capacity and Sustainability of Ordinary Nonprofits.” Nonprofit Leadership & Management. 22(1), 37 – 51.

Grasse, N., Whaley, K., and Ihrke, D. (2016). “Modern Portfolio Theory and Nonprofit Arts Organizations: Identifying the Efficient Frontier.” Nonprofit and Voluntary Sector Quarterly. 45(4), 825 – 843.

Hager, M., and Searing, E. (2014). “10 Ways to Kill Your Nonprofit.” The Nonprofit Quarterly, 21(4), 66-72.

Kim, M. (2016). “The Relationship of Nonprofit’s Financial Health to Program Outcomes: Empirical Evidence from Nonprofit Arts Organizations”. Nonprofit and Voluntary Sector Quarterly. Published online before print. Retrieved from http://nvs.sagepub.com.ezproxy1.lib.asu.edu/content/early/2016/08/10/0899764016662914.full

Lin, W., and Wang, Q. (2016). “What Helped Nonprofits Weather the Great Recession? Evidence from Human Services and Community Improvement Organizations”. Nonprofit Leadership & Management. 26(3), 257 – 276.

Shea, J., and Wang, J. (2015). “Revenue Diversification in Housing Nonprofits: Impact of State Funding Environments.” Nonprofit and Voluntary Sector Quarterly. 45(3), 548 – 567.

Jonathan Short is a graduate of ASU’s Master of Nonprofit Leadership and Management program. He also holds a Master’s degree in Education with a special education certificate from ASU. He completed his undergraduate work at Wesleyan University, earning a Bachelor’s Degree in English and American Studies. Jonathan serves as Executive Director for Grand Canyon Performing Arts and the Phoenix Metropolitan Men’s Chorus. He works as an administrator for the Phoenix Elementary School District.

• Get to Know the Lodestar Center: Elsbeth Pollack
• Social Impact Investments