How to Evaluate a New Revenue Stream
You see the writing on the wall. Your revenue is overly dependent on a handful of major donors or a single government grant. Sure, you have a CRM full of small and mid-level donors, and a few programs that bring in a little recurring revenue. But you need to diversify your revenue streams.
The ideas come pouring in from around the organization. The development team wants to start an annual trivia night. The program team wants to establish a summer camp. Even your IT team suggested selling the research tool they built to other organizations. How does an organization identify which options make sense to pursue?
Ask the finance team.
Finance teams can help their nonprofit organizations evaluate new revenue streams, enhancing the organization’s stability and mitigating risk while intentionally experimenting with varied income sources.
Why Organizations Should Experiment with Revenue Diversity
Even when your revenue channels are strong, nonprofits should always be experimenting with their funding models. Strong revenue diversity is vital to the sustainability of your organization, and you never know when a major donor’s gift won’t come, or a grant program will shift its focus.
Dedicating a small number of resources to experimentation allows nonprofits to explore new revenue streams without jeopardizing existing operations. It’s crucial to understand that each venture is an experiment. Set timeframes that allow sufficient evaluation of what’s working, without shutting down initiatives too early, and make sure to consult with your lawyer and CPA to ensure compliance with any relevant guidelines.
In our webinar with Stephanie Skryzowski from 100 Degrees Consulting, she broke down the steps your finance team can take to evaluate a new revenue stream and support the sustainability of your organization.
1. Determine Clear Mission Alignment
The first—and most important—evaluation step is to ensure that the revenue source aligns with your mission. This alignment prevents mission creep and maintains the integrity of your nonprofit’s goals.
Review your strategic plan to ensure the new revenue stream fits within your organizational objectives. Additionally, make sure the revenue stream doesn’t compromise your not-for-profit status, which can happen if the income source is not clearly tied to your mission and exceeds a certain percentage. If you aren’t sure, check with your organization’s lawyer and your auditor.
2. Verify Feasibility
Once you confirm that the opportunity aligns with your mission, evaluate the feasibility of launching it. Consider whether you have the necessary staff resources to get it off the ground and whether there is sufficient community buy-in and demand for the service. Understanding demand for a revenue stream experiment could be as simple as a quick survey sent to a handful of engaged community members or reaching out to peer organizations to get their feedback.
Also address any legal considerations, such as intellectual property issues, to ensure that no hurdles will impede the new initiative. Again, talk with your lawyer early to verify this is a good idea to try.
3. Understand Investment Required vs. Expected Revenue
Once you know the possible new income stream aligns with your mission and is feasible, now you can look at the data. Delve into the numbers to determine the potential return on investment.
Factor in all costs, including staff time, and forecast different scenarios—best case, worst case, and most likely—to understand the impact on your budget. The goal is long-term sustainability with minimal additional resources. Evaluate whether the revenue stream has the potential to scale or if it requires minimal effort to remain revenue positive without scaling. For example, affiliate programs with local grocery stores might only require regular social media reminders once established. Even though it might only be $100 every quarter, there is no other work needed once the relationship is established.
4. Finding Organizational Champions
Identify a champion within your organization to drive the new revenue channel. If the idea originated internally, the person who suggested it could be the champion. This person will provide the strategy and leadership necessary to launch and monitor the experiment.
Regardless of who becomes the champion, encourage them to make decisions collaboratively, gathering both qualitative and quantitative data, and seek insights or experience from other team members. Keep stakeholders informed throughout the process to ensure continued buy-in and support for the new revenue stream.
Keep Experimenting
The evaluation of new revenue streams is an ongoing process. Continuously revisit and revise your plans and goals based on new data or opportunities. This approach allows your nonprofit to adapt and grow, fostering financial stability and enabling continued mission-driven success.
Experimentation, guided by a knowledgeable finance team, empowers your nonprofit to navigate the complexities of funding and to thrive amidst changing financial landscapes. Embrace the journey with open eyes and a strategic mindset, and your organization will be well-positioned to achieve long-term success.
Learn more about scaling your revenue streams sustainably, and finance’s role in that process, by checking out the on-demand webinar, Growing Smarter: Strategies for Scaling and Sustaining Long-Term Success at Your Organization.
