Saturday, May 5, 2007

Part 3: The Revolution Will Not be Funded (Diversified Funding vs. Focused Funding)

As somewhat of a tangent from previous posts about the idea that "The revolution will not be funded," I offer this exploration on the nature of funding in non-profit organizations.

This article on the "third sector" blog, White Courtesy Telephone , cites a very interesting study that will likely cause more than a few ripples in board rooms and fundraising offices throughout the sector:

Fundraising 2.0: How to Get Really Big

The key finding is this:

Bridgespan obtained solid financial data for 110 of the 144 high-growth nonprofits we identified. Of the 110, roughly 90 percent had a single dominant source of funding — such as government, individual donations, or corporate gifts. And on average, that dominant funding source accounted for just over 90 percent of the organization’s total funding.
For years, I have believed that diversity of funding was a great asset for our organization, but that this diversity must focus on providing a sustainable flow of reliable, preferably unrestricted funding. Like many social service organizations, our revenues currently include:
  • Individual Giving
  • Church Giving
  • Corporate Giving
  • United Way
  • Foundations
  • Public Funds (i.e. federal dollars)
  • Fees for Service
  • Sales (i.e. other earned income)
  • Interest (although we lack an endowment)
  • Special Events
There are a variety of campaigns within each of these, so our funding strategy is very diverse (which therefore requires quite a bit of administrative support to manage).

We have previously considered this a strength -- in fact, we have been encouraged to develop "multiple funding sources" by the United Way (which provides less than 10% of our overall revenue and yet exerts an incredible influence over how we structure our overall organization, particularly our financing structure). However, in light of the aforementioned findings, I wonder if we are truly pursuing the best strategy for our organization... which is growing by over 20% per year, while also preparing to launch a $20 million capital campaign (an amount that is about 3 times the size of our annual budget).

While pondering this, I came across Jon Pratt's insightful study of non-profit financing models... which evaluates revenues based on the reliability vs. autonomy matrix:

NPQ - Back Issues - Contents by Issue - Fall 2002 V9i3: Counting Our Blessings - npq_v9i3_fundingautonomy-reliablity_pratt

The article posits that there are three levels of reliability:
  • High reliability: United Way support, rental income, advertising, small-medium sized individual contributions, endowments, memberships.
  • Medium reliability: Ongoing government contracts, third-party reimbursements, major individual contributions, fees for services, corporate charitable contributions.
  • Low reliability: Government project grants, foundation grants, corporate sponsorships.
Similarly, the article puts forth three levels of autonomy within these funding streams with the caveat that "If you take the King’s shilling, you do the King’s bidding":
  • High autonomy: small-medium sized individual contributions, endowment, memberships, fees for services, foundation operating grants.
  • Medium autonomy: major individual contributions, corporate charitable contributions,
  • Low autonomy: Third party reimbursements, government project grants, ongoing government contracts, foundation project grants, United Way support.
This article also includes a Reliability–Autonomy Worksheet that you can use to calculate your organization's "score." This is also available in a great Excel spreadsheet format here:
http://www.nonprofitquarterly.org/files/298-32.xls

Reading these two articles should help non-profit managers and fundraisers to better understand the barriers that they face, as well as their opportunities for future growth. From my perspective, there are three primary sources of funding that all non-profits should emphasize as the base for their funding strategy:
  • small-medium sized individual contributions,
  • endowment,
  • memberships
Additionally, I believe that earned income (rental income, advertising, fees for service) is a fairly reliable source of unrestricted income.

What are your thoughts? I would be very interested to hear how your organization's financing is structured, as well as the strengths and weaknesses within your current model.