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Alternatives to Diversification

Before your organization seeks to diversify income, consider three ways you may be able to move toward financial sustainability. This post continues a series on income diversification before we continue our Nonprofit Chart of Accounts Grand Tour on income accounts.

1. Reduce expenses

Before you consider new sources of income, make sure you are not spending money unnecessarily. One nonprofit appeared to have a large percentage of expenses going to program services. We looked more closely and found they were actually wasting a great deal of money on inefficient program administration. Some of the inefficiencies resulted from a lack of skills on the part of an administrator. Other inefficiencies were driven by poorly executed or nonexistent policies to guide how programs worked.

By fixing problems with program administration, the organization was able to save thousands of dollars each year.

Another organization found they were paying thousands of dollars unnecessarily in Federal unemployment taxes. 501(c)(3) nonprofit organizations are not required to file and pay Federal unemployment taxes. A similar story happened with a nonprofit that had fallen below the requirement to pay Florida unemployment taxes. They were able to opt out of the Florida reemployment system and save thousands of dollars.

2. Rebalance the organization’s portfolio of program and fundraising activities

Often nonprofits deliver services at below-market prices that do not cover the full costs of the program. The process of analyzing the gross profit or loss from a particular program is called cost accounting. Gross profit or loss does not include general and administrative costs. Those are real expenses, too, and must be covered somehow.

In the book “Nonprofit Sustainability,” authors Jeanne Bell, Jan Masaoka and Steve Zimmerman help nonprofit organizations visualize the interrelationship of programs and fundraising activities in terms of impact on mission and profitability. The challenge we see for most nonprofits is assessing the income or loss from each program and fundraising activity separately. Once you understand the impact in terms of mission and money of each program or fundraising activity, you are in a better position to make decisions about how to manage them. You may decide to increase the size of some activities, reduce the size of others, or even completely eliminate certain activities. Older organizations may find they have legacy programs that no longer fit within the organization’s current priorities.

By balancing money losing activities (which may be at the heart of the organization’s mission) with money producing activities, an organization can find a sustainable path forward.

3. Reduce the number or types of funding sources

One organization we worked with relied heavily on special events. They did six major events each year and several small ones. They were having problems with turnover in their special event manager position. (That’s a head scratcher.) Perhaps stepping back and looking at each event, then keeping the two best ones would have resulted in more income and less stress.

Similarly, trying to juggle too many small grants can become a struggle. One organization hired a part time grant writer just to do the reporting on the fifteen or so small grants they received each year. The grant writer was paid about $35,000 per year. Some of the grants were $5,000 or even less.

Part of the challenge may arise from accepting restricted gifts and grants that can only be used for certain purposes and that require reporting. These funds have a “hidden” cost in the administration of the funds. Plus they may require the organization to take on new expenses to carry out the restricted purpose, so the new funds are not all a net gain. Consider carefully the administrative requirements and impact on expenses of funding you accept.

Diversification – the question or the answer?

Making an organization financially sustainable requires looking at the problem creatively from many angles. We hope the above ideas have you thinking.

“The wise man doesn’t give the right answers, he poses the right questions.” – Claude Levi-Strauss

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