What’s the best mix of income for your nonprofit? How can you build sustainable revenue streams that make you resilient and self-sufficient?

You’ve got lots of options – that’s the good news – but not every option is relevant to every organization.

Consider the following facts and principles.

Where money comes from

Broadly speaking, nonprofit organizations generate revenue in three ways.

Grants are provided by charitable foundations, corporations, and government agencies: federal, state, local, and so on. In addition, some service clubs and faith-based organizations offer grants.

Nearly all grants require an application or proposal. Some funders pre-select groups and invite proposals, and not everyone is invited.

Individuals give in many ways, ranging from membership and automatic monthly giving to major gifts. (You decide what “major” means, based on the budget and culture of your group. These gifts are usually solicited in person.)

People also contribute online, via crowdfunding sites, and at benefit events. Some give through their workplaces; others use donor advised funds. Many individuals include nonprofits in their estate plans and bequests – these are known as planned gifts or legacy gifts.

Earned income is generated by charging for your services – for example, program fees or tuition. Some organizations sell products related to their charitable mission, while others receive investment income from their reserve funds or endowments.

Of these three categories, earned income is the largest source of funding for U.S. nonprofits. If that’s not part of your revenue mix, ask yourself: why not?

Pros and cons of each strategy

Each flavor of money carries its own benefits and risks. The following table offers a simple summary.

	Pros	Cons
Grants	Large amounts; short-term, it’s a good return on the time invested Good source for program funding Get organized! You need goals, impact metrics, budgets, etc. in your proposal	Competitive; lousy odds of success Mostly restricted money Possible mission drift: “chasing grants” Government grants are affected by outside forces that are hard to control
Individuals	Lots of options: more than half the population gives to nonprofits Unrestricted money Demonstrates community support “Lifetime value” – donor giving adds up over time	Donor retention and upgrading takes time and investment Board resistance – this is the category where boards can potentially help the most, but often don’t
Earned income	Requires strong financial systems Potential for greater program impact through participant investment Diversifies revenue Mostly unrestricted income	Tendency to under-price and therefore lose money on fee-based programs Some programs can’t be monetized Can be controversial or challenging, especially if you serve low-income participants

As you can see, “free money” doesn’t exist. Each strategy has potential but also comes with risks and challenges. Smart organizations weigh the pros and cons of each and build their fundraising plans accordingly.

Why diversify?

The most resilient groups raise money from a variety of sources. This approach offers more opportunities to grow your budget while mitigating the risks of losing a primary grant or donor.

Here’s an example. During the Great Recession, nonprofit income across the U.S. dropped by 10% – 15%. The organizations with the most diverse revenue made it through with the least pain. In contrast, groups that relied primarily on government funding seemed to suffer the most.

The next recession will come, sooner or later. The time to diversify is now.

How do you benchmark income diversity?

There’s no optimal ratio – for example, 20% grants, 50% individuals, 30% earned income – that’s relevant to every organization, because every circumstance is different.

Nonetheless, I humbly propose these three benchmarks.

The big funder test. If you receive more than one-third of your budget from one foundation, one donor, or one government contract, watch out. If that grant or gift goes away, you will struggle to survive.

The unrestricted income test. Ideally, you want at least two-thirds of your operating budget to be unrestricted money. This usually comes from individual donations and program revenue, rather than grants.

Unrestricted money provides maximum flexibility to run your organization as you see fit.

The “Who owns your organization?” test. Once upon a time, I asked a client, “Who owns your organization?”

“Our members,” they said proudly.

“Excellent. And what percentage of your budget comes from membership donations?”

Ten percent came from the membership, while the balance came from foundation grants. As we talked through the implications, the group became uncomfortable.

Like it or not, your biggest investors tend have the greatest ownership stake and therefore the most power over mission, strategy, programs, and so forth.

In the ideal world (which isn’t always the real world), the community members you serve and engage – your customers, clients, participants, and members – would be your primary owners and investors. As you build your budget and your fundraising plan, keep that in mind.