Alternative Sources of Revenue Streams

by: Steven and Chutisa Bowman
Copyright 2008 by Conscious Governance.
All rights reserved. You may forward this in its entirety to anyone you wish.

Many nonprofit organizations place themselves at an inappropriately high level of risk by having only one primary source of income. Whether it be a charity whose income is from government grants, or an nonprofit organization whose existence is dependant upon project related external funding, or a membership based organization whose primary source of income is membership fees, they all place themselves at risk through over reliance on one or few sources of income.

This "concentration" risk can be managed, and in fact turned to strategic advantage, by identifying the numerous alternative sources of income that are possible, and developing revenue producing services that further the nonprofit organizations vision and mission.

Research out of the USA has shown that the larger a Nonprofit organization, the greater reliance there is on non-dues (or non-member) income (ASAE 2006). Non-dues revenue in itself is neither good nor bad. It is the way in which this source of income fits with the mission of the organisation that is either a good fit, and therefore assists the organization fulfill its mission, or it is a bad fit and may therefore detract from the organization fulfilling its mission.

Two traps with Non-dues Revenue

Often Nonprofit organizations fall into one of two traps in devising and implementing alternative revenue sources.

Firstly, they may not utilise alternative revenue sources because they do not have the culture of running the organization like a business, or do not view their organization as one that has potential for providing services to stakeholders over and above what they have traditionally provided. This is true particularly of sporting and welfare nonprofit organizations.

Secondly, nonprofit organizations often have a habit of growing alternative revenue sources without consideration of their impact on the mission and objectives of the organization. This leads to problems of providing services that are not needed by stakeholders, but which generate significant income and therefore the organization becomes reliant, or that "pet projects" that do supply a source of alternative revenue detract from the organizations ability to resource those services that truly represent the needs of stakeholders. This is more true of the membership organizations.

Alternative Sources of Revenue and the Nonprofits Strategic Plan

Categorising alternative revenue sources based on their impact on the Strategic Plan is an essential management tool that allows an organization to monitor the source and use of alternative revenue. The Strategic Plan is essential as a management tool as it identifies those activities that the organisation MUST get right in the next few years. It is all too easy to get sidetracked with pet projects (either from the Nonprofit Executive Director or from Board members), or projects that generate funds, but do not add to the mission of the organization. This will, without doubt, divert resources and focus away from what the stakeholders have identified as those things that the nonprofit organisation must get right in the next few years to achieve the mission of the organization. There are three categories of alternative revenue sources that I have found useful:

Category 1 :Alternative Sources of revenue from activities totally unrelated to Strategic Plan

Recommendations

a. These should have a formal Board Policy that recognises the activity is not covered by the Strategic Plan, and is thus outside of the formal planning strategies the organization has adopted

b. The explanation given to the nonprofit Board and/or to the stakeholders needs to be more detailed, giving reasons for the activity, and the impact on the organizations resources (cash and personnel). There is an increased potential for stakeholder dissatisfaction with the employment of the revenue derived from these activities, or from the resources necessary to manage the activity. There is an increased chance that this revenue will be expected to subsidise other services.

c. These types of alternative revenue sources should be regarded as activities that contribute to the financial profit of the organisation, NOT to the operating costs.

Examples:

1. Group Benefit Promotions (revenue from 3rd parties for sponsoring a program that benefits members)

• a. Group Insurance programs
• b. Credit Card promotions
• c. Telephone/Internet Discount schemes
• d. Cause related marketing

2. Fundraising events

• a. Benefit Dinners
• b. Sales of Unrelated Products
• c. Silent Auctions

3. Investment income

• a. Retained earnings
• b. Endowments

Category 2 :Alternative Sources of revenue from activities marginally related to Strategic Plan.

Recommendations

a. Establish a policy (not necessarily at Board level) that covers

• 1. Justification for introduction
• 2. Objectives
• 3. Responsibility structure
• 4. Operational parameters (eg. Types of activity, range of acceptable activities)
• 5. Evaluation of Policy

b. Typically these activities allow the Nonprofit to achieve its objectives in an indirect way, eg advertising allowing the journal to be of a higher quality, or bigger. These activities should be reported against the key service that the strategic plan has identified as necessary. Eg advertising reported against journal, sponsorship against Conference, products against marketing or P.R. plan. This will focus the Boards attention on the reason why these sources exist, and their contribution, not just financial, to the functions of the organization. It will also highlight if these sources start to become irrelevant to the mission of the organization.

Examples

• 1. Advertising
• 2. Products promoting the Nonprofit(mugs, decals, umbrellas, folders etc)
• 3. Sponsorship

Category 3: Alternative Sources of revenue from activities directly related to Strategic Plan.

This category is the greatest opportunity for the organization to meet stakholder needs in innovative ways.

The Strategic Plan identifies strategies and Action Plans that provide the blueprint for the organizations activities. For each Action Plan, there may be up to three commercial activities that can be undertaken by the organization that not only enhance the results of the action plan, but generate revenue as well.

This is an opportunity for the senior leadership team to provide some innovative, value-added service to the Nonprofit organization. This category is the breeding ground for services that will be found to be indispensable, and which set the tone and culture of the organization.

Example Strategy c: Develop a Technical infrastructure for the AIBF Action Plan c.3

Target: Develop the Research/Library resources necessary for effective functioning of information collection and dissemination

Project: Finalise policy and procedures for library and research papers within existing financial constraints

Resources: National Office, Publications Portfolio (Alternative revenue opportunity: catalogue and bind articles from journal into a series of readings on specific topics, sell to market; commission books on hot topics for sale; sell the catalogue to the market)

Summary

Category 1: Alternative Sources of revenue from activities totally unrelated to Strategic Plan

Recommendations

• a. Formal Board Policy needed
• b. Explanation given to Board and/or to constituency needs to be more detailed,
• c. These types of alternative revenue sources should be regarded as activities that contribute to the financial profit of the organisation, NOT to the operating costs.

Category 2: Alternative Sources of revenue from activities marginally related to Strategic Plan.

Recommendations

• a. Establish operational policy
• b.Report against the key service that the Strategic plan has identified as necessary. Eg advertising reported against journal, sponsorship against Conference, products against marketing or P.R. plan.

Category 3: Alternative Sources of revenue from activities directly related to Strategic Plan.

• a. Develop your Strategic plan
• b. Measure existing services, including alternative revenue sources, against the Strategic plan
• c. Use the Strategic plan to stimulate new ideas for services that can generate resources.

Last Word For every activity your organization undertakes currently, there are at least two commercial spinoffs that you have not yet identified. Now go and find them!!

About the authors: Steven and Chutisa Bowman are international speakers, best-selling authors and global leaders in providing practical frameworks and comprehensive approaches to assist Boards and Senior Executive Teams to reach higher levels of conscious awareness in governance, leadership, strategy and risk. Authors of Conscious Leadership-the Key to Success, and Leading Yourself to Money with Consciousness.

Steven Bowman can be contaced by E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it . . . This article may be distributed or reproduced as long as the copyright and an active URL is included.