Maximizing Nonprofit Revenue Streams

More and more often boards of nonprofits are asking their team to “act more like a for-profit business” or “develop earned income.” Both of these can be admirable ventures and impactful opportunities if done correctly and properly directed. However, starting with a foundational Revenue Strategy is critical to finding success here. Just like a for-profit business would start with a business plan for a new business unit (which depending on where your nonprofit sits this may also be a good idea), starting with a revenue strategy is critical to identifying how your funding will come in and how to maximize it. We’ve broken this down into three steps, although there can be a lot of depth in each of these for your organization.

1 - Direction

Mission Alignment

This is sometimes often forgotten by the board of directors. When they say “act more like a for-profit business” or “develop earned income” but the fact of the matter is if your organization tries to start maximizing revenues without ensuring they align to mission there will be a long-term problem that occurs as donors separate from your mission. Ensure two things early on, the revenue strategy aligns to your mission and you can easily connect the dots for donors.

Unrelated Business Income Tax (UBIT)

Another area that is often forgotten, which in the end ties into the next area (Expenses), is that many nonprofits simply think they are tax-exempt and that tax-exemption is blanket coverage. That is simply not true. Things like tenant income or certain sales may not be seen as related business income and could be taxable. The IRS defines UBIT as “income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or another purpose that is the basis of the organization's exemption.” The best solution here is before embarking on a new revenue path, discuss it with your accounting firm to know how to designate certain revenue streams.

Expenses

There are two major considerations here:

• If your revenues aren’t going to meet your expenses, how do you handle it? Are you able to create new revenue streams? Increase the current ones? or cut expenses?

• If your revenues are going to exceed your expenses, especially if they will exceed them substantially, how can you expand your mission?

Both of these are legitimate considerations and need to be considered. The first step is identifying your planned expenses and building in a contingency because none of us have a crystal ball. The second step to consider is defining which are ongoing expenses and which are capital expenses. This will be especially important when considering a capital campaign.

2 - Revenue Streams

Fundraising

Here, we break fundraising down into a few categories, but could easily be broken into more. We focus on grants, individual giving, and corporate giving. Each of these has its own unique pathways and its own intricacies. In addition, your mission may or may not relate to some of these. As an example, we have helped in establishing a membership organization that is unlikely to garner grant support. Understanding that is critical in defining your pathway. What is important is there is one fundamental principle that transcends all of these groups, RELATIONSHIP BUILDING (that’s right all caps so that we are clear).

• Grants - There are several forms of grants, government grants from groups like the National Institute of Health; local governments supporting certain initiatives; corporate grants which typically align to very specific initiatives depending on the corporations giving guidelines; and foundation grants which also likely have specific areas of interest. All of these likely follow a similar pattern of having submission deadlines, have disbursement dates, filing requirements, etc. Some require you to be invited to submit a proposal. It’s important to remember, especially with grants that require an invite that like any other fundraising your organization needs to build a relationship with the grant organization otherwise you will not maximize your grant potential.

• Individual Giving - Whether this is through membership or annual giving/donations, individual giving is probably what people initially think of first when thinking of fundraising. There are many options when it comes to individual giving events, direct mail, individual/group meetings, and online appeals to name a few. Whatever the path(s) your organization chooses to take here, it is important to understand your community of donors, meaning how many people will care about your message (and don’t mistake your own passion for everyone else’s). If you live in a community of 10,000 people, expecting 9,000 members may not be realistic. Build models with realistic targets and understand that they don’t happen on day one. Also, understand that people don’t give based upon an initial appeal, typically we see that five touchpoints are the average here, meaning inviting someone to an event, sending them direct mail, and having them follow you on social media where they see a few messages may be required before they make a donation. Everyone is different, some will donate after one touchpoint, others will take ten touchpoints.

• Corporate Giving - Much of this follows the same principles as larger individual giving, identify the groups you’re interested in, develop the messaging appropriate to meet their interests, and then set up individual meetings with the right people within the organization. Too often we see that people seek board members from organizations to get in the door, but don’t realize the people they’ve asked to join their board may not have an influence upon giving. There may be, and hopefully are, other reasons these people have been invited to join the board, but if gaining major donations from their corporation is a primary goal, consider who they are and their relationships within the corporation.

Earned Income

There are many forms of earned income: an online store selling hats and t-shirts; a restaurant at a museum; ticket sales for an event; and there are also some incredibly unique options out there (a favorite of ours are these Chicken Pot Pies from Lydia’s House in St. Louis). Earned income is a great thing for an organization, especially when it aligns with the mission. The biggest reason is you now allow the people purchasing your product or service to better understand your mission which opens the door to them for further giving. The counter to this is how much effort may need to go into supporting and growing these opportunities: are they getting in the way of fulfilling your mission or are they truly supporting it? Also, does your organization have the capacity at this time to develop this earned income correctly? Doing something halfway or wrong will likely end up in disaster. If you decide to host a ticketed event but don’t have the time to set up and organize, as well as market the event, your attendees may be minimal or feel it wasn’t worth it. Bad word of mouth will ruin the future of the earned income faster than anything else. Simply put, make these efforts thoughtful extensions of your brand.

Endowment

We would all love to have more endowment, even those groups that have an immense one like certain universities or art museums. Ensure you have a well-structured Endowment Policy (that has been adopted by your Board of Directors) and make sure it’s understood. Simply put most endowments have a target earnings of 7% (+/- a little bit), and of that, the organization is allowed to spend 3-4%. The organization also plans for 2-3% average inflation (long term need to maintain purchasing power) and 1-2% growth. Each year the Board of Directors should approve the usage of the endowment earnings as a part of annual budgets. Including an endowment piece in a capital campaign is typically a good idea for growing the endowment, most individuals or groups are willing to accept that 10-20% of the capital campaign will support an endowment, beyond that usually requires strong reasoning that can easily be understood by the donors.

Planned Giving

It’s important to remember that planned giving is a long-term play but can have tremendous impacts. Typically, this is good to start small and in partnership. Options may include partnering with a local financial advisory firm to “teach” about planned giving having a luncheon, or cocktail hour, once or twice a year to help people understand planned giving. Part two is asking them to make you aware of planned gifts, while that check showing up unexpectedly is a pleasant surprise it’s usually better to know if people have planned to support you. Part three is understanding the restrictions, if any, that go along with the gift. As an example, a university we have worked with had an issue at one point that people were restricting it to the beautification of the campus which is noble and great. As gifts of this sort grew, people were wondering why there were so many statues and artwork around campus and didn’t understand the reasoning until it was explained in terms of restrictions placed on gifts. Obviously unrestricted is preferred, but many times planned giving will have some restrictions to it, make sure you honor those restrictions.

Capital Campaigns

Capital Campaigns have a lot of moving parts to them and take significant capital and time to execute properly. With that said, when they are done right they can push your organization to new heights. We recently did a program on Capital Campaigns During COVID for the Massachusetts Cultural Council that can provide some insights into handling your own campaigns. Here are five key numbers we suggest people keep in mind when looking at capital campaigns:

• 20% - A capital campaign won’t work without a lead donor, and while 20% should be the target often times these donors end up making up as much as 50% of the campaign.

• 75% - Don’t go public with your campaign until you are 3/4 of the way through it. Major donors will likely make up 90+% of your campaign, expecting those $100 gifts to get you there is unlikely to succeed.

• 5 - Typically major donors pledge gifts over 5 years, so don’t expect it to show up on your books right away.

• 2-3% - Most auditors will require you to plan for a 2-3% annual loss in pledges when doing your annual audits and 990’s. This number may go up depending on certain factors within your organization.

• 15% - Capital campaigns are time and cost-intensive. Oftentimes groups plan to spend 15% of the campaign on overhead. If you can find a donor to cover that overhead during the campaign it can be a great benefit as your note to the other donors can be “all funds you pledge will go to the capital campaign.”

There are many things to consider during a capital campaign, as we note in our talk for the Mass Cultural Council what type of campaign is being undertaken, a true favorite of ours that often gets overlooked by some organizations is a Destroy the Debt campaign. Eliminating debt can be a true lifesaver to some organizations, and depending on the environment, some donors may be very receptive.

3 - Execute

Too often this is the step that is forgotten when planning is done. After developing your revenue sources if you don’t execute, your efforts were all for naught. Analyze the resources necessary to fulfill your mission, and plan out their timelines. For instance, if you are doing an end-of-year mailer, start working with the mailhouse in late August/early September. Waiting until November can compromise the opportunity. Line up a graphic designer if necessary; talk to the mailhouse about what works best and the primary targets; truly understand what will make your campaign successful. Alternatively, if you’re going to begin working through a capital campaign, a feasibility study is likely your first step. Engaging a consultant to do this is critical. You’ll need an RFP to seek proposals, funding to pay the consultant, a list of interviews, etc. All of these things take time and resources and are part of executing. It is important for both board and staff to understand that none of these items “just happen” and that may require some training. Put yourself in a position to succeed.

NMBL Strategies brings incredible talent and experience to support strategy and plans. Whether you’re in need of a full strategic plan or a revenue strategy or something simpler like developing your corporate giving plans, NMBL’s experience is incredibly useful in seeing these things through to success. NMBL also uniquely works with clients on execution and not just planning, so we’ll walk you through to the finish line. Contact us today to learn more.