Building Your Nonprofits Sustainability We will begin shortly. - - PDF document

1 Building Your Nonprofit’s Sustainability

We will begin shortly.

Strengthening Your Nonprofit’s Income Portfolio

What We Will Cover

• Steps in developing an income strategy
• Judging whether a nonprofit’s income portfolio

meets its needs and protects against risk

• The types of support available to nonprofits
• How to identify a nonprofit’s most likely sources
• f support
• How to assess the real value and costs of

potential sources of support

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1. Initial review of income mix 2. Define the details and expenses of programs that achieve the nonprofit’s mission 3. Using this information, identify the nonprofit’s likely sources of support 4. Apply initial screens:

– Is the source of support readily tapped and does it seem to be available in sufficient amounts? – Does tapping the source seem feasible? – Is the source broadly consistent with the nonprofit’s values?

Steps in Developing a Nonprofit Income Strategy

5. Conduct market research into $ value and direct costs of the sources that pass the initial screen 6. Develop “value vs. cost” analysis for each main income source that you are considering for investment 7. Test each main income source that you are considering for investment 8. Make the investment decision

Steps in Developing a Nonprofit Income Strategy, continued Case Study: SUSTAIN

Review of Income Portfolio

City contract: Day Service 1,050,000 Community Outreach 483,000 Subtotal 1,533,000 DRS contracts: 292,000 Fundraising: Foundation grants 403,000 Corporate partnerships 82,000 Net proceeds of golf tournament 73,000 Subtotal 558,000 Other income: 13,000 GRAND TOTAL 2,396,000

3

Initial Review of Income Mix, continued

Diversified revenues:

• More than one type of financing

(e.g. government contracts, bequests)

• Several payers in each type

(e.g. individual donors, different government streams)

• Unrestricted as part of the mix
• One dominant source, 2 – 3 “supporting streams”

1. Initial review of income mix 2. Define the details and expenses of programs that achieve the nonprofit’s mission 3. Using this information, identify the nonprofit’s likely sources of support 4. Apply initial screen:

– Is the source of support readily tapped and does it seem to be available in sufficient amounts? – Does tapping the source seem feasible? – Is the source broadly consistent with the nonprofit’s values?

Steps in Developing a Nonprofit Income Strategy

• Traditional categories of nonprofit income

– Private contributions – Fees/Earned income – Government funding – Interest on investments and dividends

• Partly defined by IRS categories
• There are >12 sources of revenue that require

different management and/or technical approaches

• “Support” includes both cash and in-kind support

Types of Support Available to Nonprofits

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Nonprofit Finance: Forms of Support

Mission Services

• ffered

Nature of benefits Income Portfolio Who will pay? Analyze:

• Availability and sufficiency
• Consistency with nonprofit’s values

Identifying the Nonprofit’s Likely Sources of Support

Type of Benefit Who Gets the Benefits

Identifying the Nonprofit’s Likely Sources of Support: Benefits

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• Nonprofit service or activity generates

direct benefit to individual; individual can be excluded from service

– e.g. health care, counseling, theater performance

• Type of payment: fee in direct exchange

for service

Identifying the Most Likely Sources of Support: Private Benefits

• Nonprofit activity or service generates benefit

that, once produced, everyone gets

– e.g. clean air, national defense

• Nonprofit activity produces benefits that have

political support and mandate

– e.g. workforce development, support for veterans

• Types of payment:

– Federal/state/local grants and contracts – Vouchers – Medicaid and Medicare

Identifying the Most Likely Sources of Support: Public Benefits

• Number of people or a community benefit, and

difficult to exclude, but benefits not sufficiently widespread or popular to attract public funds

– e.g. research into rare medical condition, support for victims of disasters, avant-garde theater

• Who pays?: people with affinity or interest,
• r brief/policy to support a given area
• Types of payment:

– Donation – Bequest – Grant

Identifying the Most Likely Sources of Support: Group Benefits

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• Activity generates economic or social benefit for third party

(other organization or individual not in receipt of service)

– e.g. traders who retain customers because of nonprofit transport scheme for seniors, advocacy coalition (exchange of one nonprofit’s resources for another’s staff), corporations that buy nonprofit’s reputation to increase their own sales

• Types of payment:

– Membership/affiliation – Barter – Sponsorship/Cause related marketing deal

Identifying the Most Likely Sources of Support: Trade Benefits

Combined benefits = multiple potential sources of income

Identifying the Most Likely Sources of Support

Private Benefits Public Benefits Trade Benefits Group Benefits Income combo Example Why? Fees only Gift shop Consumer benefit only Gifts only Rare disease research Benefits those afflicted or at risk Government

• nly

Offender rehab services Increases public safety Fees & gifts Performing arts Private benefits to attendees; collective benefits to art lovers Fees & government Pre-school care Private consumer and general public benefits Government & gifts Monitoring environmental quality Benefits to outdoor enthusiasts and general public Fees, gifts & government University education Private student, collective alumni, and general public benefits

Combined Benefits = Multiple Potential Sources of Support

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Applying the Approach to Your Nonprofit

• Describe in some detail each main program:

nature of service/activity, including its location and any equipment/technology it employs

• Brainstorm who benefits and who might pay
• Capture potential sources of support

for each program Your nonprofit’s overall potential portfolio

Case Study: SUSTAIN

Identifying the Nonprofit’s Likely Sources of Support

Program/ Service Who benefits How they benefit Type of benefit Who might pay How they might pay

Employment Services Individuals with experience of substance abuse Independent living and contributions to the community Private The individual Fees Family, friends and

• ther carers

Someone they care for being helped/less of a burden to them, and succeeding Private Family, friends and other carers Fees Local Employers Need skilled labor; opportunity to be good corporate citizen Trade Local Employers Partnerships in training and work-provision People with experience

• f substance abuse as a

group Recovery and independent living; reduction in stigma Group Family and friends, people with experience of mental illness, community groups Donations Other nonprofits dealing with mental illness and homelessness SUSTAIN make it easier to have an impact with their services Trade The other nonprofits Partnerships in referrals and training; Joint Ventures

• Dept. of Rehabilitation

Services SUSTAIN seen as cost-efficient way of providing service, delivering mandate Trade The Dept. of Rehab. services Contract to supply employment service The city and surrounding communities Less homelessness, fewer visits to the ER, lower policing costs, increase in tax base Public The Dept. of Rehab. services Contract to supply employment service

1. Initial review of income mix 2. Define the details and expenses of programs that achieve the nonprofit’s mission 3. Using this information, identify the nonprofit’s likely sources of support 4. Apply Screens:

– Is the source of support readily tapped and does it seem to be available in sufficient amounts? – Does tapping the source seem feasible? – Is the source broadly consistent with the nonprofit’s values?

Steps in Developing a Nonprofit Income Strategy

8

Case Study: SUSTAIN

Applying Screens First screen:

• Looked for potential sources that could be ignored:

– Insignificant amount – Impractical

• Ruled out:

– More government contracts in Fractious City: saturation point – Healthcare providers: previously unsympathetic – Referral and training partnerships with other nonprofits: too small – Police, Community bodies, Retailers: interesting, but potentially complicated

Case Study: SUSTAIN

Applying Screens, continued

Summary of position after SUSTAIN has applied screens

• Two sources of support that justify the

next step – detailed market research

– Individual donations – Partnerships with other nonprofits: coalition to campaign to change legislation

Case Study: SUSTAIN

Applying Screens, continued

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5. Conduct market research into $ value and direct costs of the sources that pass the initial screen 6. Develop “value vs. cost” analysis for each main income source that you are considering for investment 7. Test each main income source that you are considering for investment 8. Make the investment decision

Steps in Developing a Nonprofit Income Strategy

• Identify the key factors in assessing

sources of support

• Capture these in a framework that

aids decision-making

– Encompasses qualitative as well as quantitative – Can be used to evaluate one source and compare number of sources

Developing a Real Value vs. Real Cost Analysis

Contributions Government Funds Fee/Earned Income In-Kind Support Investment Income Individual giving; some memberships Grants Fees for service, some memberships Volunteer & pro bono work Returns on endowment Bequests Contracts Sales/ commercial venture income Gifts of real estate Interest on

• perating

funds Corporate and Foundation grants Reimbursements Royalties and license fees Art and other collections Program- related investments Special events Credits & vouchers Rental income Partnerships with others

Nonprofit Finance: Forms of Support

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Ideal objectives

• Value: enough in kind and $ to cover costs

and provide a surplus

• Cost of securing support: enough expenditure to

secure the highest value at an acceptable margin

• Relationships: the easiest to attract and maintain
• Reliability: relatively high level of certainty about

timing of support and all or most support provided

• ver long periods of time
• Independence and Control: relatively low level of

funder influence on nonprofit's decisions; support can be used on any aspect of the nonprofit's work

Developing a Real Value vs. Real Cost Analysis, continued

Value (direct $ value, ‘crowd-in’ value, added mission value, minus ‘crowd-out’)

Real Value vs. Real Cost Analysis: Decision-Making Framework

For each source or expansion in income generation from a source:

vs. Direct operating expenses, start-up capital and working capital and hidden transaction costs (the costs related to Relationships, Reliability, Control, and to the management of new resources)

Overall ‘real’ value =

• Potential gross $ value:

– amount of activity that source “buys” = $ amount or $ value of gift-in-kind

• Additional direct mission impact e.g. client buy-in
• Value attracted (“crowded-in”) in addition to

gross value, e.g. work of art

• Minus the Value displaced (‘crowded-out’)

e.g. government funding vs. donations

Decision-Making Framework: Real Value

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Overall ‘real’ costs =

• Direct operating expenses
• Start-up costs
• Hidden transaction costs

Decision-Making Framework: Real Costs

• People
• Materials
• Services

Real Costs: Direct Operating Expenses

• Start-up capital and working capital

– New people, facilities, equipment – New skill sets – New systems and processes – Managing extra resources

• Managing the extra resources:

– Extra reporting relationship – Potential for additional fixed costs

Real Costs: Start-up Costs

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Real Costs: Hidden Transaction Costs

• Attracting and managing relationships

with source(s) of support

• Managing reliability
• Managing independence and external control
• Attracting and managing relationships

with sources of support

– Supporters and potential supporters – Relationships between supporters and people at different levels in nonprofit – Deciding and controlling messages – Organizing work and systems to support relationships

Real Costs: Hidden Transaction Costs,

continued

• Managing reliability

– Planning inflows and outflows and mix of sources – Building a reserve

Real Costs: Hidden Transaction Costs,

continued

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• Managing independence and external control

– Achieving a match between funder’s and nonprofit’s goals – Achieving right mix of restricted and unrestricted income – Negotiation of specifications and reporting requirements – Reconciling funder requirements with nonprofit’s values

Real Costs: Hidden Transaction Costs,

continued

Summary of position after SUSTAIN has applied initial screen

• Two sources of support that justify detailed market research

– Individual donations – Partnerships with other nonprofits: coalition to campaign to change legislation

Case Study: SUSTAIN

5. Conduct market research into $ value and direct costs

• f the sources that pass the initial screen

6. Develop “value vs. cost” analysis for each main income source that you are considering for investment 7. Test each main income source that you are considering for investment 8. Make the investment decision

Steps in Developing a Nonprofit Income Strategy

14

Initial Review of Income Mix

Diversified revenues:

• More than one type of financing

(e.g. government contracts, bequests)

• Several payers in each type

(e.g. individual donors, different government streams)

• Unrestricted as part of the mix
• One dominant source, 2 – 3 “supporting streams”

2013 2014 City contract: Day Service 1,050,000 1,020,000 High value, but only one payer Community Outreach 483,000 520,000 Subtotal 1,533,000 1,540,000 DRS contracts: 292,000 275,000 Only one payer Fundraising: Individual donors 150,000 Unrestricted, many payers Foundation grants 403,000 280,000 Unreliable Grant for collaboration 20,000 Grant has enabled creation of alliance, access to others’ resources Coalition dues 50,000 Corporate partnerships 82,000 40,000 Net proceeds of golf tournament 73,000 95,000 Subtotal 558,000 635,000 Other income: 13,000 15,000 GRAND TOTAL 2,396,000 2,465,000

Case Study: SUSTAIN

Making the Investment Decision: Reviewing progress

Structured approach to strengthening a nonprofit income portfolio:

• Initial review of income mix for potential, costs and

protection against risk

• Identifying the most likely sources of support
• Assessing the real value and real costs of each

potential investment in a source of support

In Summary

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In Summary, continued

A balanced income portfolio:

• $ value: sufficient to cover operating costs and produce surplus
• Affordable and acceptable operating and start-up and

hidden costs of generating income

• Ensures level of independence and external control and reliability

Diversified revenues:

• More than one type of financing (e.g. govt. contracts, bequests)
• Several payers in each type (e.g. individual donors, different

government streams)

• Unrestricted as part of the mix
• One dominant source, 2 – 3 “supporting streams”

In Summary, continued

• A nonprofit’s sources of support are best identified by

exploring the benefits that its programs and assets generate for different individuals, groups and organizations

• The value of a source includes other support that it attracts

and the direct mission impact produced in generating its income, as well as its own value

• The costs of a source include the hidden costs of attracting

and maintaining its support, as well as the direct operating and start-up costs