Income Diversification: Moving Beyond Reliance On Your Reserves

With rising costs and increased demand for services, nonprofit organisations are facing unprecedented financial pressures. Against this backdrop, income diversification has become more critical than ever.

Income diversification is the key driver of survival and growth of nonprofits. Income diversification is critical. We all know it, yet many organisations are still relying on their reserves to function for another year ahead. This is simply not a sustainable strategy. 

Recent data from the Charities Aid Foundation (CAF) shows that out of 621 charities interviewed in their research report last year, nearly half (46%) have used their reserves to cover shortfalls in income. And looking at all that has been thrown at the sector over the last few years, it’s no wonder that this has happened, but it is not a long term strategy for survival. This is a concerning trend that needs addressing.

Of course, there are so many factors affecting the sector - changes in government, the state of the economy, and so on. That being said, businesses are still surviving, and other nonprofit organisations are still finding ways to generate income and fundraise. 

There are multiple funding opportunities available, and as an Executive Director, it's about working out what the best route to income generation is for your organisation. Here's a breakdown of where nonprofits are typically generating their income. 

1. Individual Giving: This remains a critical funding stream, often representing a majority share of voluntary income for many charities.

2. Corporate Giving and Grants: While smaller than individual giving, these typically contribute around 5-10% of total income for many charities. (CAF)

3. Government and Institutional Grants: These can represent 20-30% or more of a charity's income, especially for those involved in public services or large-scale projects. (Charity News)

4. Earned Income and Social Enterprises: This can range from a small supplementary amount to being a primary source of income, sometimes making up 30-40% of a charity's budget. (CAF)

5. Private Foundations and Major Donors: These can be significant sources of funding for many organisations.

6. Legacies and In Memoriam Giving: This is one of the largest sources of income for some charities.

7. Community and Event Fundraising: This approach can generate valuable income while also raising awareness and building community engagement. The contribution varies widely depending on the charity's size, cause, and local support base.

So, what should organisations do if they find themselves relying on reserves? The first step is to recognise that drawing on reserves is not a long-term strategy. If you're using your reserves, it's a clear indicator that your income strategy isn't working effectively.

There can be multiple reasons for this beyond just fundraising issues. It could be staffing problems, absence or absenteeism, recruitment difficulties, cultural issues, performance issues or perhaps the wrong operational model. It's important to look at the whole picture within your organisation. 

Remember, trustees carry the legal responsibility for the organisation. They're ultimately responsible for whether the organisation succeeds or fails. While they delegate the operational running of the organisation the Board carry the strategic responsibility. The lead officer, whether they're called CEO, director, or manager, should be working with the board to develop and implement the organisation's strategy and operational model.

A good strategy shouldn't just react to current circumstances but should anticipate potential challenges. For example, the Harmony Education Trust ran a successful capital appeal, raising just under £4 million for a new education building. They set up a specific capital appeal committee to work alongside their Board, recruiting people specifically to open doors for their fundraiser. This committee had delegated powers from the Board and a clear two-year timeframe.

This approach contrasts with organisations that lack an overarching strategy and simply chase any available funding without a clear plan. Such reactive approaches often lead to inconsistent results and difficulty in securing sustainable funding.

If your organisation is currently relying on reserves, here are some steps to consider:

1. Develop a clear strategic plan if you don't already have one.

2. Create a specific fundraising or income generation strategy that aligns with your organisational goals.

3. Consider setting up targeted committees for specific fundraising initiatives.

4. Think about how you can secure unrestricted funding, not just restricted funds.

5. Look beyond just fundraising - examine your staffing, structures, and performance for potential improvements.

It's worth noting that changing governments can slow things down, affecting budget decisions and policy directions. This uncertainty can lead to short-term funding arrangements, which can have long-term effects on organisations.

The nonprofit sector faces significant challenges, but there are opportunities for organisations to think strategically about income diversification. By moving beyond a reliance on reserves and developing comprehensive funding strategies, organisations can work towards more sustainable financial futures.

The key takeaway: Don't wait until your reserves are depleted to act. Start planning your diversification strategy now. Engage your Board, staff, and stakeholders in the process. Remember, a proactive approach to income generation is not just about survival—it's about creating a solid foundation for your organisation's future impact and growth.

If your organisation is in need of support with your income diversification strategy and/or you are struggling with how to go about your financial planning and fundraising, I can help. Please contact me on LinkedIn to arrange a time to chat.