4 Sources of Revenue

“What is your size?,” is one key benchmark asked about a nonprofit, which is nearly exclusively measured by the total of an organization’s revenue. In the study’s first year, the group reported revenue by type. As you might expect, there were various sources. The data was complex to analyze, as each nonprofit had multiple names for its revenue sources.

Out of this confusion, a lightbulb came on during that meeting. The group decided to think more broadly, as this data could have given more helpful information overall. After much debate and moderation by Steve Howell, now chief operating officer and chief financial officer of Best Friends Animal Society, the group adopted a principle it has sustained for 20 years: “There are only four sources of revenue for nonprofits.”

All of the revenue types can fit into one of these four categories. Moreover, these four sources have similarities and differences that can assist the strategy and direction of where you place its time and emphasis depending on organizational needs.

So, what are these four sources?

1. Philanthropy: These are “gifts” made to a nonprofit. Their donation classifications are unrestricted, restricted, or both. Philanthropy can come to an organization in roughly five ways:

• Event-based philanthropy: Volunteer-driven events that raise money at, for example, an auction, a dinner, a 5K, or a golf tournament, among other fundraisers. The YMCA is the first nonprofit on historical record to hold a fundraising event. It was widely used in the late 1800s and has evolved from there. Ducks Unlimited and St. Jude Children’s Research Hospital are pioneers and leaders of the event-based fundraising approach.

• Royalties: Generally speaking, these are payments made to a nonprofit for the use of its logo. Corporations want to align themselves with a nonprofit and offer philanthropy to utilize their brand imagery.

• Direct response: Probably the most common form of philanthropy in nonprofits, it can be defined as individual regular giving for a membership or annual giving to the cause. It takes shape in digital giving or response to a mailing request.

• Major Gifts: This is the process of cultivating donors to give significant dollars to nonprofits, usually for a particular purpose. Many suggest this as the essential facet of philanthropy.

• Planned Gifts: This term is commonly used in the nonprofit community to represent deferred gifts made by donors with forethought (or a plan), typically carried out by a trust or a will. Planned gifts require fundraisers to discipline themselves to invest in relationships over many years, gaining donors’ trust to treat them like family members.

2. Investment Income: This income is most commonly from an endowment. Universities and hospitals have been leaders in developing endowments to generate unrestricted revenue or income restricted to mission-only expenditures.

3. In-Kind: These are gifts of resources or services used for the programs inside nonprofits. It can come in many forms, such as legal resources, event or office space, or supplies donated for a mission or cause. Goodwill, Good360 and World Vision annually receive large in-kind gifts.

4. Non-Philanthropy: This is income generated by grants or contracts generally contingent upon specific program spending requirements. Most of the time, these are restricted public or private grants (or contracts) that require a nonprofit to spend the money and report under a specific restriction.

You might have heard the expression “All money is green.” You try to raise as much as possible to support mission, but is some money greener than others? The answer is a resounding “Yes.” Adopting this “yes” as your answer will help you become more strategic regarding your long-term mission delivery.

At strategic planning and campaigns for nonprofits, facilitators often ask an organization’s leadership, “What is the best use of your resources?” Managers mostly believe the best use of fundraising revenue is for the mission. While this is an excellent use of resources, it fails to consider the balance of other options for using the money to invest in the needs of the nonprofit’s fundraising, people, or sustainability. Your nonprofit is different from any other. It is a wise exercise to understand where resources could be more effectively stewarded for a decade or more. This is a longer-term view.

Based on this exercise, it is easy to conclude that the greenest money is the money available for a nonprofit’s greatest long-term needs. Managers need to review the mix of resources of today and think about how they want their combination of resources to look tomorrow.

Here are a few ideas to deepen your understanding.

Investment income generally comes from investments saved over multiple years. There are two “buckets” of nonprofits — those with and without endowments. Those with endowments have built them over a long period of an executed strategy of saving and building endowments, most likely from planned gifts. If your organization does not have a planned giving program, you should start one. If you have one, you should build it up. Endowments provide income in perpetuity.

In-kind donations are both revenue and expense for nonprofits. It’s an even-sum game. They are an excellent resource for accomplishing the mission but, as a stand-alone, do not provide other resources for use. Managers should consider contemplating how to multiply philanthropy by asking for more than in-kind gifts, which might be tax deductible for donors. An example is one nonprofit that held in high esteem a donor who had given an in-kind contribution of more than $50 million. While this was great for the mission, the development officers asked for only a $10,000 cash gift to accompany the in-kind donation. The question is why the donor received a $50 million tax deduction while the nonprofit held the bar so low on the size of the cash gift.

Non-philanthropy most often require spending an equal dollar amount of revenue received (or a net of zero) or a larger amount than what is received (a net negative). Grants are a great way to leverage your mission needs to have a more significant impact, but they do not provide extra resources to be used for other important needs of the organization.

Philanthropy is the only money that can be saved, does not have to be spent, and can build reserves or endowments.

You’ve heard the phrase “cash is king.” In the nonprofit world, “philanthropy is king,” and the right mix and development of those five sources of philanthropy are critical for your organization’s success.

It would be best if you explored with your leadership where you currently invest your time and energy on developing revenue sources with a lens toward how you could maximize the investments to generate the best long-term results for your nonprofit and your mission.

Bob Mims, CPA, is chief financial officer and senior consultant for the Sharpe Group in Memphis, Tennessee, and chair of the Environmental Roundtable. His email is bob.mims@sharpegroup.net.