Expanding your Nonprofit Revenue Model
Now, more than ever, developing an reviewing your nonprofit revenue model is critical for your organization. The process for creating a revenue model is to explore the universe of potential revenues that your agency can pursue and developing strategic choices based on your current capacity and the investments needed to strengthen those capacities or build new capacities.
This is the third article of an informal series on nonprofit revenue development (see here and here). So far, we overviewed how a nonprofit revenue strategy must be built upon your organizational strengths; how expanding revenue streams must be intentional rather than opportunistic; and, in this article, we will outline a practical approach to creating a revenue strategy. Creating a revenue strategy will require a few hours of preparation, generally 2-4 hours of planning with your board (sometimes more depending on your organizational complexity); and additional time for more detailed planning based on the directions you determine to pursue. While in a short article, we can’t cover the details and nuances of a planning process, we can outline a general planning framework.
1. Determine where you are today: The first step is to examine the last 3-5 years of your revenues based on actual end of year statements (and possible projections for the current year). By grouping your income into broad buckets you can develop a snapshot of your revenue trend. When your done it might look like figure 1.
2. Ask yourself hard questions about where you are: Once you have a picture of “where you are” as an organization, begin to ask yourself hard questions about the durability and focus of your current efforts. Start from your revenue core and move outward. In the hypothetical nonprofit represented in figure 1, core questions might include: How reliable is our funding from government grant and contracts? Is the funding based on a contract renewal? On what cycle? How competitive will the renewal be? Is funding tied to a core service provision of the funding agencies or is it discretionary? What do we need to do between funding cycles to stay “top of mind” for the funders? Questions on the edges might include” When considering time, staffing, and outcomes, does the ROI of events and fee for service justify the effort we put into those two revenue streams? Are there revenue streams not on this list that can be added?
3. Ask yourself the really hard questions: As uncomfortable as it may feel, it is important to ask really hard questions: What would we do if we lost our primary grant funding? If we exclude our government grants, over the last 5 years we averaged about $60,000 of total revenue. Does that revenue justify our existence as a standalone nonprofit or would our clients, donors and other stakeholders be better served if we merged with another nonprofit and became just a program area within a larger organization?
4. Invest in strengthening your core: Based on strategic conversations your current about revenue mix, the first phase of planning is to ensure that you are adequately investing in maintaining the status quo. In this example, the organization exists solely based on government grants. Does the agency have performance metrics that meet contracted requirements and are there metrics designed to maintain and expand government relationships? Can they have a voice in shaping the next RFP? Do they do minimal reporting or are they actively helping your funders understand your organization more fully and other ways that your nonprofit can support government program goals? It is only as your core is strong, and you ask questions to strengthen your core. can you then begin to think about expanding or diversifying your revenues?
5. Look for the second right expansion answer: As you look to expand your revenues, the first right answer often jumps out at you. In our example here, government grants are followed the next most successful funding stream is foundation support, which also often requires developing written proposals and grants. In thinking about expansion, it might be tempting to say, “let’s expand our grant writing because we are good at it.” Indeed, it might be the case that revenue growth could be accelerated by investing in systems and capacity to write more grants. However, in planning your expansion strategy you might want to look for the second right answer. I have worked with a couple of nonprofit agencies with profiles similar to this one. In one case, the agency invested very successfully in growing earned income exponentially, simply by hiring a dedicated training director focused on building a robust fee-for-service training model. Alternatively, while events and donations represent the smallest portion of our hypothetical organization’s budget, it might be worth their time to hire a fundraising consultant who can assess the untapped potential of their current databases and mailing lists. Donations and events may be the second right answer to drive revenue growth.
6. Build a plan: It is my bias that unless your organization builds a structured revenue plan, you increase the chances of missing the mark. Depending on the nature of your revenue development decisions, the plan could resemble a traditional fundraising plan, look more like a business plan, or tactics-focused spreadsheet with measurable milestones, or even a visual roadmap. The format is less important than form. The point is that a written strategy drives management, action and performance.
The goal of this series of posts has been to lead you though the thinking about revenues from starting from your core, planning for innovation, and considering your funding edges. These are themes I have explored before (see here, here, and here) and, with good reason, now repeat and extend some of the ideas. The capital markets of philanthropy and grant making is changing. In addition to being inefficient many funders are narrowing their focus, and changing strategic directions. The playing field is not longer level. Such capital markets must be approached with a highly tuned business acumen and strategy. I have seen it over and over again that those nonprofits that invest in strategic thinking and acting are better equipped to develop, adapt, and attract the resources needed to control their mission, vision and impact and those who fail to invest in strategy, continue to struggle.
As always, your thoughts are welcome.
Photo Credit Luis Llerena