Creating Your Nonprofit’s Right Revenue Mix: The First Cut — Resource List Part 1
Diversifying Nonprofit Funding: The Business Considerations May Not Be What You Think!
In this first installment of a two-part collection on the topic of adding or removing revenue streams from your organization’s fuel line, we present research that examines whether revenue diversification — or, on the other hand, revenue concentration — is necessary for nonprofit financial health.
For decades, diversification was unquestioned as a mandate of nonprofit financial management, but as a blanket prescription, it has glaring limitations. The more recently advanced proposition is that revenue concentration is a positive attribute, especially if you are looking for growth. This also has its limitations, though, not the least of which is that size (or purported size) in and of itself may not be the best proxy for financial health or organizational impact.
Still, related to the idea of revenue concentration, Elizabeth Searing has written some fascinating stuff on “field isomorphism,” or why fields tend to use the funding streams their peers use as central sources. In Bridgespan’s latest research, the authors refer to these funding streams as “natural matches” — and one of the studies below, in fact, suggests that the predominance of isomorphic revenue streams actually becomes more pronounced with greater age, size, and maturity. We have included links to a collection of pieces on this topic below, but we lead with a great “it depends” article from our own Mark Hager, who argues the case with an eye toward a level of specificity even researchers have not begun to touch upon.
Video:
Accompanying Slides: Download here.
Transcript: Coming Soon.
Diversification or Concentration: Is That Really the Question?
Is Diversification Good for Financial Health?
As authors Hager and Hung explain, it depends: “Strategy, expertise, history, commitment, cause, and revenue mix differ from case to case, with a million different permutations… study your own case, think through the ramifications, talk to everyone involved, and make your best calls without paying undue attention to an overly simplified prescription.”
Diversification Reconsidered: The Risks and Rewards of Revenue Concentration
Peter Frumkin and Elizabeth Keating take another look at the wisdom of diversifying one’s revenue mix:
Against the dominant trend in the literature that focuses on the risks of revenue concentration, we find that nonprofit organizations that have highly concentrated and specialized forms of revenue actually experience some significant benefits, in the form of lower administrative and fund-raising expenses. However, these savings are associated with greater exposure to swings in an organization’s financial position. Based on our study of the broader world of nonprofit organizations, we conclude that social entrepreneurs likely face a more complex set of choices about the composition of their revenue than previous research has suggested.
How Nonprofits Get Really Big (2007) & A New Look at How U.S. Nonprofits Get Really Big (2024)
This pair of articles from the Stanford Social Innovation Review make the argument that if you are after sheer size, revenue concentration may be the way to go.
Read the article and its follow-up.
Beyond Donations: Isomorphism and Revenue Mix in Nonprofit Startups
We posit that nonprofit entrepreneurs choose to mimic larger organizations in their field for growth rather than rely on the revenue mix of their start-up stage. This study uses two different dynamic econometric models to estimate the role of revenue type and other organizational factors in the growth of young and small nonprofits. We find that mimicking the revenue habits of larger organizations is generally (but not universally) advisable, with most conclusions sensitive to subsector.
More General Research about How and Why to Mix Revenue
Accumulation of Unrestricted Net Assets as a Motivation for Diversified Funding: A Dynamic Analysis
Thad Calabrese, writing for the Nonprofit and Voluntary Sector Quarterly in 2011, observes that many nonprofits seek secondary sources for their ability to add to unrestricted net assets and reserves — even when the dollars may not seem to justify the effort:
Notwithstanding its importance as an internal source of financing, no analysis has examined why nonprofits choose to retain unrestricted net assets. As restricted net assets might not be used as desired by the nonprofit manager, unrestricted net assets are a more accurate definition of available internal resources than total net assets. This article tests several theories that might motivate nonprofit accumulation of unrestricted net assets. Furthermore, the empirical strategy employed allows an analysis of unrestricted net asset accumulation over time and overcomes several significant statistical estimation issues. The results suggest that nonprofits target profits and seek their accumulation over time, although targets may be set at very low levels. Furthermore, the results suggest that the low levels of profits accumulated annually are for the purpose of reducing organizational financial vulnerability. The results also suggest that many nonprofits behave as if leverage and unrestricted net assets are substitutes.
Nonprofit Revenue Strategy and Downside Risk: Applying Portfolio Theory and Extreme Value Theory?
This 2023 article by Saerim Kim for the Nonprofit and Voluntary Sector Quarterly argues that it is best to incorporate portfolio diversification that seeks a negative correlation between sources to avoid simultaneous losses:
The risk of revenue instability is a concern for any nonprofit. Existing research leads to the well-known strategy of equalizing revenues across sources to reduce revenue volatility. This study offers several expansions to this strategy.… The results can help nonprofits consider incorporating downside risk in revenue portfolio management to enhance financial security.
