Current nonprofit sector research and recommendations for effective day-to-day practice from ASU faculty, staff, students, and the nonprofit and philanthropic community.
As nonprofits explore ways to maintain sustainable growth, diversifying revenue has been a recurring focus for many. But what does it mean to diversify a nonprofit’s revenue? Investors diversify investment portfolios in order to decrease volatility and to see more stable returns on their investments. Nonprofits seek to do the same by diversifying the sources of funding they rely on to fulfill their missions.
Importance of Diversifying Revenue
Nonprofits are competing for finite resources in unpredictable climates. The recession exposed the vulnerabilities of many organizations who relied too heavily on funding that decreased during the hard economic times. Although charitable giving has been on the rise year after year, smart nonprofit managers are seeking to strengthen their organizations to sustain growth in the future.
Resource dependence theory states that an organization is controlled by the sources of funding on which they rely to operate. Those who control the resources hold the power. Organizations with fewer sources of funding feel these impacts even more. A 2017 study found that over half of nonprofits surveyed reported resource constraints as being a top concern, followed by managing growth at 42 percent.
Not all funding is created equal - some brings with it stipulations that require additional resources for organizations to manage. Others are highly unpredictable and cannot be relied upon for long-term funding.
How and When to Diversify
The goal of diversifying revenue is to mitigate risks associated with uncertainties in funding. That being said, diversification of revenue is not a one-size-fits-all solution to an organization’s struggle to maintain growth. To start, a nonprofit must determine what their own internal capacities can afford to manage, as well as what they hope to achieve by taking on new funding.
If a potential new source of funding includes constraints, restrictions or intensive reporting requirements, the organization must determine if they are able and willing to lose some autonomy in their pursuit of revenue. For some, this may be a tradeoff they are willing to make. If your organization has the capacity to manage any requirements associated with the new funding, or if they align with current operations and the mission, then the loss of autonomy might be worth it.
Reliability of revenue is another factor that must be considered before expanding to new sources. If the organization is raising funds to sustain a long-term program, then relying on highly volatile revenue is a bad bet. Once an organization understands how it will be affected by potential new sources of funding, it is ready to determine if diversifying is right for them.
Impacts on Sustainable Growth
Nonprofits need to bring in revenue in order to operate. As economic and political climates change, so does the availability and reliability of their funding. A diversified portfolio of revenue helps alleviate the burdens associated with those uncertainties by spreading out the risk over multiple sources.
If an organization relies solely on one or two sources of revenue, they run a higher risk of losing funding altogether than if they spread their funding out over a manageable portfolio. As the organization becomes more efficient and adept at handling their revenue, they can look at seeking out additional funding, thus helping them grow.
Chase Zwissler has been deeply passionate about the nonprofit sector since first volunteering as a child. Currently the Director of Operations of Organic Growth Marketing, he plans to one day focus his energy back to wonderful world of nonprofits. In the meantime, he stays engaged through volunteering, and he recently completed his Master of Nonprofit Leadership and Management from Arizona State University.