With economic concerns and inflation looming large across the U.S. economy, nonprofits are among those feeling the brunt of its impacts, creating vulnerability and concern for hundreds of organizations. Amid conflicting donor strategies, nonprofits that hope to steel themselves against economic headwinds need to diversify their revenue base to withstand whatever comes next.
It’s a hard time to be a nonprofit. Recent reports by Giving USA have shown that philanthropic donations are down over the past two years when adjusted for inflation. More folks are keeping money in their pockets as they face economic uncertainty, tamping the market and limiting the base of potential donors.
Even government-funded fee-for-service nonprofits — whose revenue models are generally seen as being more stable because of government arrangements and contracts — are feeling the crunch, as governments are challenged to balance their own budgets. As a result, annual cost-of-living increases are nominal or nonexistent. Government grant funding to nonprofits is held with no increases or even reduced. These challenges have created a domino effect that reverberates throughout the network of nonprofits.
It’s a major concern for organizations. Without sufficient revenue, nonprofits are forced to begin cutting vital programs that communities depend upon — programs that in many cases serve highly vulnerable populations.
For leaders of these organizations, today’s uncertainty should be a clarion call: It’s time to diversify your revenue streams. It doesn’t matter if your organization raises a few thousand dollars or a few million; whether you depend on private donations, institutional support, grants or government dollars, raising money from different sources builds resilience in nonprofits that can be invaluable.
Nonprofit fundraising is rarely a one-size-fits-all solution. The needs of a family foundation, for example, are very different from those of medical service providers, which are different from traditional philanthropy-type nonprofits.
Certainly, there’s a lot to be said for concentrating on one funder type. One study found that 90% of large nonprofits relied on funding from a single category — usually philanthropy, but government contracts and grants as well. Concentrating on one group can help lower costs for nonprofits, and it’s certainly easier. Being able to draw from the same well of grants or turn to the same major donors time and time again takes some of the variability out of development and can lower the resource strain these teams face.
However, without diversification, organizations risk significant exposure. When a grant dries up, funding gets cut or one major donor merely has a change of heart, suddenly, the economic footing isn’t so sure. Even a nonprofit that thinks it is sitting comfortably amid a bed of government contracts should prioritize building a network of philanthropy.
We regularly see examples of nonprofits being forced to shut their doors because of shifts in how government contracts are being deployed — or even just because of delays governments face in getting money out the door. Workers get laid off, services get reduced and, in some cases, even 200-year-old nonprofits get shuttered.
Philanthropy gives nonprofits something to fall back on and is more within the power of the organization to control than a government contract. It’s a “takes money to make money” proposition. Some groups spend tens of thousands of dollars running golf events and charity galas, while other organizations would put that money toward one-on-one donor cultivation and stewardship. It’s a matter of prioritization for these nonprofits, and successfully expanding the donor base requires a keen sense both of what your organization is and who the target audience is.
Philanthropy is deeply personal for many donors. What compels someone to donate to a cancer research organization is going to be different from what compels them to give to an anti-sex-trafficking group or one that addresses the education of individuals with special needs. In jumping into philanthropic fundraising, nonprofits must be strategic in their approach and adjust their expectations and goals accordingly.
Yet doing the hard work is essential, as diversification helps build economic resilience for nonprofits, giving them, at the very least, a rainy-day fund to fall back on. The value of a rainy day shouldn’t be underestimated. Whether the funds are saved for use in crunch times or spent investing in staff — perhaps boosting the oft-neglected staff salaries — they give nonprofits flexibility and safety. If deployed correctly, a rainy-day fund can become another source of revenue generation, leveraging today’s high-interest environment and market returns to build a sizable endowment or sourcing new, high-dollar donors.
This is not to say that every nonprofit needs to fundamentally rethink its revenue models, but it certainly should consider how it can add to them. If a $10 million organization can raise just 2% of its budget through philanthropic efforts, it would be enough to give it a healthy start.
Fluctuations can be a killer for organizations that haven’t invested enough thought into their revenue sources. As the economy continues to shift and government priorities hang in the shadow of an election, having diversified funding to fall back on can be a lifeline for nonprofits.