Seven Principles for Building a Nonprofit Revenue Model
The opening premise of this article is simple. Creating and acting on a clear nonprofit revenue model is an essential strategy to support the long-term stability of your organization. Without intentional strategy your agency is less resilient and less in control of your future. Creating a revenue model is the process of thinking about the potential universe of funding accessible to your organization and making strategic decisions about preserving, increasing and/or expanding revenue streams with the highest potential of working within the constraints of your organizational capacity.
I had the privilege of speaking on this topic at the Nonprofit Network of Southwest Washington “Moving Forward Together! Conference 2012.” As with most conference presentations, the collective experience and wisdom of the audience strengthened the learning process and helped to make the session practical to the realities faced by local nonprofit leaders. In this post, I hope to capture the essential themes of the workshop related to developing a revenue model and also post the presentation slides as well.
Without attempting to narrate each of the slides, I would like to focus this article on presenting critical principles related to developing a nonprofit revenue model. The principles should provide a framework that enables your nonprofit to start the intentional conversation about developing a long-term revenue strategy.
1. Start with Reliability and Autonomy Rather than Diversity: In my consulting practice, I still find that many nonprofit organizations hold to the conventional wisdom that “nonprofit revenue diversity is good and concentration is bad.” While the “balanced portfolio” approach to nonprofit revenues might suggest that there is some security in diversified revenues, I propose that “diversity” is the wrong starting place for developing a nonprofit revenue model. Instead, I believe that the concepts of reliability and autonomy are the real drivers of nonprofit revenue planning (Nonprofit Quarterly articles on the subject here & here). In the workshop, we discussed how assessing the reliability of revenues ensures that you meet your budget and how autonomous dollars often increase resiliency, adaptability, and fuel innovation. We also talked briefly about how some nonprofit organizations actually achieve reliability through a strategy of revenue concentration (Stanford Social Innovation Review article here). So the first principle in developing a revenue model is to have a thoughtful exploration of your agency’s reliability and autonomy of revenues.
2. While Many Revenues are Possible – Not all Revenues are Feasible: Once you understand the reliability and autonomy of your current revenue the next principle is to vet the options for expanding revenues. While many new revenue streams might be accessible, your pursuit of new revenues should be constrained by your organization’s acumen to plan, execute the plan, and have the patience to see the investment yield returns. Part of this feasibility planning is to consider the costs of adding new revenues.
3. Understand the Cost of New Revenues: This principle of developing a revenue model should be fully considered and not underestimated. Every change in your revenue model comes at a direct and indirect cost. Two indirect costs are obvious. Each new revenue stream takes time to develop and manage and each new revenue stream brings another potential taskmaster in terms of accountability, restrictions, and reporting. Both of these place additional burden on administrative costs. Further, while it is obvious that the skills to be a successful grant writer are not the same skills for raising individual donations, often nonprofits try to expand their revenue strategies using their existing capacity. Unfortunately, this often leads to mediocre or even disastrous outcomes more often than it leads to successful outcomes. Anticipating and planning for the true costs of raising revenues greatly increases your chances for success.
The for profit sector has long recognized that you often have to invest money (or raise additional money) before developing a new revenue stream and, that more, that it might take years before the investments yield a positive return on investments. The principle of “it takes money to make money” is understand by successful nonprofit organizations who build the same principle in resource planning. This understanding naturally leads to a corollary principle.
4. Operating Revenue is not Investment Capital: Most nonprofit agencies understand the unique role of a capital campaign. Raising money to renovate, buy or build a facility or raising money to purchase a new delivery truck is an effort above and beyond operating revenue. However, I would propose that beyond investing in buildings and trucks, nonprofits should think of expanding revenue streams as a “capital need” and consider planning a capital campaign for the infrastructure (staff, technology, etc.) required to expand your revenue model. While I have written more about this elsewhere (here), the bottom line is that capacity is more likely realized in when donors understand how their investments will create a long-term return.
5. A Plan for a Revenue Model that is not Written — is only an Idea: A mentor of mine once said any good idea that isn’t written down is a good idea. Write it down and it comes alive. Many nonprofit organizations spend lots of time talking about changing revenue models but avoid putting in the time, effort, resources, and structure to create a formal revenue plan. Is it hard to find the time to meet, plan and decide then write it down but, without a plan, you risk having the strategic overwhelmed by day-to-day. Written plans are critical to your success, whether it is embedded in a larger strategic planning process for your agency or developed as a stand-alone document. In either case, a clearly written business plan guides your decisions related to revenues. Further, a written plan is also part “prospectus” that can be used when seeking investments, which, in turn, depends on communicating your plan.
6. Communicating A Revenue Plan is Essential: At the workshop yesterday, I spoke with several individuals after the presentation and we discussed how a well written revenue plan opens the door for different conversations with your existing funding agencies and donors and opens doors for conversations with new potential funding agencies and donors. A clear plan, executed well, will go far in raising understanding, confidence and attract investments in your plan. A revenue plan, in tandem with a clearly focused strategic plan (as a single or separate documents) is the basis for communicating about your potential, focus and drive.
7. Implement, Monitor, and Adapt: The final principle, that quite honestly got underplayed in the workshop, is that developing a revenue model and plan is the easy part. The challenge is to stay focused, implement and fearlessly adapt. The best of plans may fail if a Board of Directors does not take its participation and oversight functions serious enough or if an Executive Director is under-equipped to hold staff accountable for performance. Yet, even in the best of circumstances your revenue plan needs to be a living document with room to adapt and change –provided that adaptation is not simply an excuse to avoid the hard work at hand.
While some of these revenue model principles may be review for some nonprofit agency, I am convinced that those nonprofit agencies seeking to stay on the edge of innovation and growth, find the time and discipline to plan, implement and adapt. Taken together these seven principles form the basis of building a nonprofit revenue model. Connected to these principles should be process, tools and timelines to help your organization build a revenue model that increases the reliability and autonomy of your budget.
Photo Credit: jamessoladujoye