Diversify. In the business sector it’s gospel that a more diverse portfolio is more financially stable. But “there hasn’t been a lot of work done specifically on nonprofits to look at how this [revenue] concept applies to them,” says Keely Jones Stater, a sociologist affiliated with the University of Connecticut.
Stater and coauthor Deborah Carroll, an associate professor of public administration and policy at the University of Georgia, looked at all the nonprofit organizations registered with the Internal Revenue Service—almost 300,000 of them—over the course of 13 years (1991-2003). “As nonprofits become more diversified, depend more equally on a variety of funding sources, they reduce their financial volatility,” says Stater. “When they experience a loss in endowment, or donors are no longer able to donate, they are able to turn to another source of income to bridge the gap.”
A good example of an organization with a diversified revenue portfolio is a university, says Stater. They have endowments (investment income), charge student tuition (earned income), and receive contributions (donated income), and that has helped them weather recent storms. Nonprofits that rely primarily on donations experience more financial volatility over time. The researchers recommend adding grants and investment or earned income.
Does this mean that nonprofits should try to pursue three equally sized income sources? Not necessarily. The study shows that institutional size matters more than diversification. Larger nonprofits with higher growth potential are more likely to achieve stability “because they have more institutional flexibility,” says Stater.
Although an even spread among income sources may contribute to stability, William Foster, a partner at the Bridgespan Group, argues that it does not contribute to growth. “The key to growing, from our research, is developing a particular source that’s a good match and that you’re a specialist in,” says Foster. “The most successful high-growth organizations are actually highly concentrated by source [such as government funding or public donations]. Ninety percent of the organizations that reach $50 million have 90 percent of their money coming from a single source.”
Foster agrees with Carroll and Stater that it’s a bad idea to rely entirely on a single source, but he says it doesn’t take much of a secondary or tertiary source to make a big difference. “Their study showed that the first 5 or 10 percent of diversification matter the most.” This should offer some measure of relief. “It’s hard enough for nonprofits to do one really, really well, to find one source that is actually a good enough match with their work to grow,” says Foster.
Deborah A. Carroll and Keely Jones Stater, “Revenue Diversification in Nonprofit Organizations: Does It Lead to Financial Stability?” Journal of Public Administration Research and Theory, 19, 2009.