Do You Have the “Right Revenue?”

By: Steve Zimmerman and Jeanne Bell

Originally appearing on “CompassPoints of View,” August 26, 2014

 

In this excerpt from our forthcoming book, The Sustainability Mindset by Jeanne Bell and Steve Zimmerman (Jossey-Bass), we explore the concept of “right” revenue as a way of analyzing and deepening your understanding of the connection between financial resources and mission impact. While revenue diversity has long been held up as a cure-all for financial challenges, the truth is that all money is not equal when it comes to resourcing social change.

Research demonstrates that successful nonprofits often invest deeply in a primary type of income and build a strong secondary stream that helps to mitigate some of the risk inherent in the primary stream. Given that, a much more relevant – and strategic – question is to explore how well your dominant revenue streams are aligned with your intended impact. That’s the question driving this chapter from The Sustainability Mindset.

At CompassPoint we often talk about “right revenue” as the state of your revenue working in concert with your intended impact and values. Rather than focusing solely on the question of income diversification, the fundamental question is this: Do you have the right revenue to pursue your intended impact in a financially viable manner that is aligned with your organizational values? To determine the qualities of right revenue, we suggest that your group look comprehensively at your particular set of revenue strategies and explore five questions.

Does the Current Revenue Mix Reliably Produce a Modest Surplus?

You may not have right revenue if, taken as a whole, it does not reliably produce a modest surplus for your organization annually. There is a difficult analysis here, though: potentially the revenue streams are capable of resourcing your intended impact with a modest surplus, but you have not yet invested in building the skills, systems, and culture needed for them to do so. In that case, it’s not about abandoning a stream but achieving greater excellence in one or more of them. Relying entirely on government contracts and small, restricted grants is unlikely ever to produce a reliable surplus for an organization, so the combination of these two streams alone is rarely right revenue.

Interrogating whether your existing revenue streams could produce modest surplus annually may also include a discussion of increasing margin with current streams. In other words, are there viable ways you could increase the return of one or more streams without significantly increasing expenses on a relative basis over time? This would typically be through raising prices for fee for service programs, event tickets sales, or in proposals and contracts with foundations, corporations, and government agencies. For instance, have you been committing to too much service for the available dollars—doing more with less as so many nonprofits have done since the Great Recession—with institutional funders? Can you work proactively as each grant or contract is up for renewal, for instance, to reset expectations and get more of your full cost of delivery covered?

After exploring this question of the potential of your streams to produce modest annual surpluses, note whether you want to emphasize maximizing current streams or whether it’s time to consider removing or adding a revenue strategy. Perhaps you might launch a major donor program to augment the annual campaign and government contracts or acknowledge that a special event whose net return continues to shrink while consuming more and more staff time has finally run its course.

Do We Have a Reliable Source of Unrestricted Support?

Unless your fee for service or restricted sources have been negotiated for a profit margin, a lack of reliable unrestricted income will lead to a lack of cash reserves and serious financial constraint. A lack of renewable unrestricted cash can leave organizations completely at the whim of their institutional funding sources without sufficient capital to innovate. In many ways, this condition mitigates the presumed competitive advantage of community nonprofits over other institutions—seeing reality on the ground—because they cannot rapidly integrate that learning into new methods and practices. Unrestricted cash is also necessary for the practical reasons of managing cash flow variations, responding to emergencies, and weathering unexpected shifts in funding. Organizations that can get to the point where just 8 percent of their annual budget is in the form of renewable unrestricted income, for instance, will have a month’s cash built into their business models.

Unrestricted income comes from one of three places: profit (net, not gross) on earned income strategies, unrestricted donations, and, for organizations with sizable endowments, interest earned. Here again we offer a caution about too much diversification in pursuit of that reliable 8 percent or more of unrestricted income. It’s hard to do all of these strategies well. Which unrestricted income type best fits the core competencies of the organization and the profile of its core constituencies?

Are Our Largest Sources of Income Paying for Work That We Deem Essential to Our Intended Impact?

You may not have right revenue if your most significant funding sources are keeping the organization committed to delivering programs that have lost relevance or that won’t allow the kind of innovation you believe is essential to deepening impact. Certain kinds of government funding, for instance, may constrain your approach to working with program participants in ways contrary to your emerging theory of change. In this case, your organization may be meeting half of the definition of sustainability (the financial half), but not meeting the mandate to develop, mature, and cycle out programs to be relevant to constituencies over time.

Taking the second half of the sustainability definition deeply to heart may require leaders to walk away from funding streams that won’t lead to this necessary dynamism in program design and innovation. Of course, making the strategic decision to move away from a historically significant funding stream is complicated and may require a slow, thoughtful exit to support clients, staff, and community members through a transition. In our experience, leaders who achieve staff and board focus on intended impact will regularly find themselves weighing the true value—not merely the dollar size—of each potential funding source: “Does it catalyze us toward impact or distract us with less important work?” Not all money is good money when your primary lens is intended impact.

Are We Relying on a Funding Stream That Is Changing Substantially, and Is That Change beyond Our Control?

As government policy (e.g., the Affordable Care Act) and institutional giving strategies change (e.g., United Way’s Campaign to Cut Poverty in Half by 2020), nonprofits may find that a stream they have long relied on is either going away or changing dramatically beyond their control. In other cases, the change is powerful but potentially can be influenced; for example, the aging of the live theater audience means lower ticket sales unless and until nonprofit theaters figure out how to appeal to younger audiences. Reckoning with the severity and timing of such a change as early as possible is critical. If one of your key funding streams is changing dramatically or going away, how proactive should you be in changing your program models? Should you experiment with seeking a new kind of funding for the work currently paid for by a changing stream? Do you have the capacity to be successful in a different funding stream? What would that success require from board and staff immediately and on an ongoing basis?

Are We Relying on a Funding Stream That Is Misaligned with Our Organizational Values?

As organizations evolve, new leaders emerge, and the politics of philanthropy change, an organization might find itself in values misalignment with a particular funding source or a funding stream altogether. You do not have right revenue if board and staff feel a substantive dissonance with a funder’s perspective on the work or the constituents being served with their resources. There is increasing recognition that nonprofits have brands too; taking resources from individuals and institutions with contrasting brands can hurt morale internally and raise suspicion among core constituents. Certain corporate donations and sponsorships may fall into this category, for instance. Or consider advocacy organizations working to pressure elected officials on current policy decisions; they may determine that taking government funding is out of alignment with their values, at least until they have seen the social change for which they are advocating. Or it may be something more internal to the organization, such as a museum deciding to make admission free seven days a week so that art and culture are democratized in alignment with their values.

Understanding “Right Revenue”

Getting to this right revenue and doing the ongoing work to stay there is integral to the sustainability mindset, and one of the very hardest parts of nonprofit leadership. For many groups, the matrix map process is their first time as a leadership team in questioning the alignment of their revenue streams with their long-term intended impact. Many organizations have grown organically with a “get programs paid for” mentality rather than a “get impacts paid for” mentality. The particular power of this process is in forcing the holistic discussion of impact and money. The resulting discussion may lead the organization to rethink its optimal revenue strategies and to set about intentionally shifting strategy over time.

Jeanne Bell is the CEO of CompassPoint Nonprofit Services and Steve Zimmerman is Principal of Spectrum Nonprofits. Together with Jan Masaoka, they co-authored the book Nonprofit Sustainability: Making Decisions for Financial Viability.

 

(Photo by Mathieu Turle on Unsplash)