Do you truly understand how your organization is funded? And do know why it matters that you do?
Unfortunately, too often nonprofit leaders and board members only have a vague sense of how their organizations are funded and what that means for furthering their missions. This is a problem because funding is an integral part of an organization’s success, and the right funding mix is essential for the growth and maintenance of any nonprofit.
An organization’s funding mix can influence its overall financial health as well as determine its reach, capacity, operational flexibility, and long-term sustainability. To strike a balance between flexibility and sustainability, nonprofit leadership must have a firm handle on how the organization’s funding sources are diversified and what kind of implications that has for the organization.
Let’s discuss the most common funding sources for nonprofits and elaborate on why each is important to your organization:
Individual Donations
Explanation
All nonprofits will have at least some individual donations (that is donations from individual supporters as opposed to groups or corporations) either as one-time contributions or recurring donations. With the rise of crowdfunding over the last decade individual donations have remained integral to nonprofit fundraising. As a result, these types of donations are what people typically envision when they think of nonprofit fundraising. However, they may very well not be your largest funding source. Some organizations can lean heavily on a wide network of individual donors to meet much of their fundraising needs, while others will utilize different funding sources as their primary means of fundraising.
Implication
Regardless of scale, what individual donations do is create a connection between donors and the organization. Individual donations are typically made by people who are passionate about a particular cause or initiative, which means that your individual donor base can potentially be leveraged to volunteer their time and other resources as well. Organizations with a thriving individual donor base are also better positioned to let their supporters promote their cause on their behalf, often resulting in more positive public perceptions around the organization as well as a more involved and dedicated supporter base that can help sustain the organization through times of uncertainty and difficulty. This “brand lift” is one key reason why organizations invest in generating individual donations.
Corporate Donations and Sponsorships
Explanation
Corporations may also make one-time donations or have ongoing partnerships with nonprofits that align with their corporate values. In some cases, these are simple monetary donations or in-kind donations and other times they are sponsorships of events and/or public programs.
Implication
While corporate donations do not foster the same connection that individual donations do, they are typically smaller in number and far larger in value, potentially making the donor relationship easier to manage. Sponsorships also provide financial backing for large public events that nonprofits put on, helping to spread awareness in a way that’s immeasurably important, especially when the corporation has a large employee and customer base that they can leverage for additional publicity.
Foundation Grants
Explanation
Grants from private or community foundations can provide the funds needed to launch a specific program or work on a specific project. These could be research-based or community-focused, but the funds received through foundation grants will need to be carefully accounted for as they are used to ensure compliance with the terms of the grant. Community grants may also have a geographic focus, meaning that they are unable to be used to broad organization-wide initiatives and instead need to be used to fund local initiatives.
Implication
When there is a good match between a nonprofit organization and a foundation grant, the resulting partnership can offer a wide array of additional benefits like relationship building, networking, and mentoring. There are plenty of foundation grants available for nonprofits to tap into, but they must be pursued cautiously. Remember, grant funds will need to be used for specific purposes, which may pull the organization in a different direction than planned, potentially resulting in mission creep. Applying for grants strategically and carefully reviewing the agreement before accepting any money is always a best practice!
Government Grants
Explanation
As the name would imply, government grants are funds provided by federal, state, or local governmental entities. Again, these are used to provide funding for a specific purpose, so they must be carefully managed to meet compliance and regulatory requirements.
Implication
Often government grants will be larger in size than private grants, but the application process may also be more difficult to complete and the decision to award the grant may take longer due to the bureaucracy involved. Additionally, when it comes to government grants, in particular, indirect cost rates must be correctly calculated to ensure that the organization is covering its costs appropriately. Failing to account for indirect costs correctly can result in an organization not being fully compensated for what it costs to run the programs that it is offering, jeopardizing its ability to continue offering them in the future. However, an organization may come out of the process with not only significant funding but also institutional connections that can be beneficial to its future success.
Fundraising Events
Explanation
One-time fundraising events like charity runs, golf tournaments, galas, auctions, or concerts can serve as a significant funding source when done correctly. In fact, some smaller organizations may rely on a single major annual fundraiser for most of their operating budget.
Implication
Fundraising events can bring in support from the larger community instead of just the organization’s existing supporter base. People who may not have otherwise supported your nonprofit may be willing to do so if they are able to participate in a desirable experience because of doing so. While these types of events do not necessarily generate ongoing support from participants, they can help to make a name for the organization in the local community and create a one-time revenue boost. They also help to portray the nonprofit in a positive light in the community by associating it with the positive attributes of the event itself (for example, family-friendly, fun, wellness-oriented, or sophisticated).
Earned Income
Explanation
Some nonprofits generate their own revenue by selling goods and services and this funding will need to be managed like it would at a for-profit entity in terms of pricing strategy, inventory management, fulfillment, and so on. For some nonprofits, the goods being sold may be simply promotional in nature (like shirts and water bottles with the organization’s name on it) while other nonprofits may sell standalone products and donate the proceeds to the organization.
Implication
Selling merchandise adds a layer of complexity to a nonprofit’s financials, but it also offers financial independence. Depending on the organization’s success, this funding strategy can also add some stability as other funding sources fluctuate.
Membership Fees
Explanation
One type of earned income that is in a special category of its own is membership. Nonprofits may collect membership dues in exchange for providing exclusive experiences, information, or resources to their members. Typically, nonprofits that have paying members will have a deep network of staff and resources to foster a sense of belonging in this community.
Implication
Like any other type of earned income, this can provide financial independence, but membership dues also serve a much more important purpose – to unite an organization’s audience. Nonprofits with a thriving membership community can leverage that group of engaged and passionate people in any number of ways to help them strategically – like soliciting feedback about current initiatives, acting as a focus group for new ideas, giving them a say in the future direction of the organization, and so much more!
When you need help with your organization’s strategic financial management, please reach out to us! Our nonprofit CFO consulting services can assist with funding, budgeting, and compliance. With CFO Selections as your partner, you can rest assured knowing an experienced executive is supervising and improving the financial side of your organization. We have a team of experienced nonprofit CFOs and Controllers that can consult on grant reporting, cash flow projections, expense reduction, financial reporting for stakeholders, and much more!
