Ways To Diversify Your Revenue Streams
CAITLIN G. GIBBS, CPA
Many not-for-profit organizations learned the importance of revenue diversification the hard way over the past two years. Unexpected reductions, or even elimination, of certain revenue streams had them scrambling to meet increased demand — or simply to stay afloat. So how can your organization achieve the greater financial stability that typically comes through diversification?
The case for multiple streams
Perhaps the most prominent argument in favor of revenue diversification boils down to “hedging your bets.” Your organization could lose a large grant, a recession might dampen individual donations or government funding priorities could shift. But if you have other incoming revenue, it can minimize the disruptions while you look for ways to fill the gap.
Multiple revenue streams also can provide organizations with greater autonomy. If your not-for-profit organization is overly reliant on a single funding source, it may have no choice but to accept certain constraints (for example, donor-imposed restrictions) that come with that funding. And expanding revenue streams can expand your not-for-profit organization’s network of connections. Connecting with a community foundation or major gift donor could give you access to people and entities with similar interests and means.
Additional streams to consider
If your organization determines that diversification is a good strategy (see “Potential Pitfalls” below), you have several options, including:
- Adding New Income-Generating Products or Services. Think about service fees or product sales that can generate earned income. One of the easiest solutions is to charge a fee for services you already offer. Say you provide tutoring for low-income students. You could charge students from wealthier families for the same service. You also could offer fee-based lectures or seminars related to your mission, live or online.
Branded merchandise is a common revenue source. The possibilities are wide, from t-shirts, mugs and hats to items buyers can use to advance your cause. for example, An environmental organization might sell reusable hemp bags or water bottles.
Bear in mind that you could end up subject to unrelated business income tax (UBIT) if your new product or service line is not substantially related to your tax-exempt purpose. Your ORBA CPA can help you factor that into the equation.
Related Read: Prevent the UBIT Trap of Corporate Sponsorships
- Broadening Your Targets for Contributions. There is no overstating the value of individual donors, but organizations can get complacent about their donor base. Do not just rely on your loyal donors — work to grow your overall donor base. That said, those loyal donors also are potential targets for major gifts. Research your regular supporters to determine if they have the wealth and philanthropic interests to make significant gifts. If so, start paying more attention to nurturing those relationships.
- Teaming Up With Corporations. Corporations can shore up your revenues in several ways, from large-scale funding to small, project-based support. You could join forces with a company for a cause-related marketing campaign, with the corporation donating a percentage of the resulting sales. Perhaps a company would agree to a matching program. Or a corporation could make in-kind donations. And do not overlook other types of contributions such as corporations that encourage their employees to volunteer.
- Ramping Up Your Grant Applications. Pursuing grants takes time and resources, things some organizations do not have in excess these days. But, with such an abundance of grants out there, it is hard to ignore this revenue stream — especially as funders may be relaxing some of their requirements in the wake of the pandemic.
In the survey “Foundations Respond to Crisis: Lasting Change?” recently conducted by the Center for Effective Philanthropy (CEP), foundation leaders signaled that they plan to continue to reduce administrative burdens for grantees, such as grant application and reporting requirements. They also plan to increase unrestricted funding.
Adding one or more revenue streams is not an overnight process. It will take planning and preparation. For example, you might need to establish new accounting processes and controls. In the long run, though, it can prove more than worthwhile. Just make sure you check with your tax advisor about potential UBIT issues.
For all its benefits, revenue diversification is not necessarily right for every not-for-profit organization. Potential downsides exist and each organization must assess whether the benefits outweigh the costs in their circumstances.
For example, it generally takes some time to get a new revenue stream up and running. Is your organization able to weather the associated costs without offsetting revenues? A new revenue stream may also have ongoing administrative costs that may concern some stakeholders who are sensitive to such expenses. Alternatively, keeping a lid on overall administration costs might require diverting resources from other programs or revenue streams.
Additional revenue streams could have the unwanted effect of “crowding out” private donations. Prospective donors who see that your not-for-profit has landed new grants or government contracts may feel that their donations might not impact the organization and will instead donate to other groups.
SARAH G. WIDLOCK, CPA
Study finds positive signs for the future of not-for-profit organizations
The past two years have been challenging for not-for-profit organizations, but the “2022 Nonprofit Technology Trends Report,” sponsored by Sage Intacct (a provider of cloud financial management), found encouraging signs for the future. For example, more than twice as many of the more than 900 not-for-profit leaders surveyed (44%) saw more of a revenue increase in 2021 than in 2020 (21%). Of those organizations with higher revenues, 34% enjoyed increases of more than 25%. And giving was higher across all types of funders — individuals, corporations and governments.
Moreover, both individual and government funding seems to have rebounded in 2021. Thirty-five percent of respondents reported that individual giving rose and 37% said corporate giving increased. Only 13% of organizations predicted a drop in revenue for the current year, compared to 36% in 2021. Of those forecasting a reduction, 72% expected a decrease of less than 25%.
A Golden Girl’s legacy to not-for-profit organizations
The loss of actress Betty White in December 2021 generated more than just waves of admiration and grief. It also kicked off a fundraising boom for a wide variety of charitable organizations. White was well known as an advocate for animals, leading to a posthumous surge in giving to several animal-related organizations that she was involved with, including the Greater Los Angeles Zoo Association (GLAZA).
According to The Nonprofit Times, the Columbus Zoo and Aquarium’s Partners in Conservation made a grant of $40,000 to the Gorilla Doctors, which protects gorillas in East Central Africa, in White’s honor. In addition, a viral social media campaign (#bettywhitechallenge) encouraged $5 donations to animal rescues or shelters in observance of what would have been White’s 100th birthday in January of this year. Even before that day, numerous rescues and shelters reported receiving thousands of dollars in her memory.
Why more not-for-profit employees qualify for loan forgiveness
The U.S. Department of Education (DOE) has revamped the Public Service Loan Forgiveness (PSLF) program that is intended to provide debt relief to student borrowers who go into public service, including some not-for-profit employees. The DOE says its overhaul will result in more than 550,000 borrowers with consolidated loans seeing an increase in payments that qualify toward eligibility for forgiveness. The average borrower will receive another two years of progress toward forgiveness.
Among other significant changes, the DOE is providing a temporary opportunity for borrowers to get credit for all prior payments they have made, even those that would not otherwise count toward PSLF. Any prior payments made while working for a qualifying employer will count, regardless of loan type or repayment plan. To receive these benefits, borrowers will have to submit a PSLF form by October 31, 2022. More information can be found at https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service.