Have You Thought About Revenue Diversification Strategy?

By Jonathan Miller, on February 16th, 2023

“The most successful businessman is the man who holds onto the old just as long as it is good, and grabs the new just as soon as it is better” – Lee Iacocca

Not-for-profits (NFPs) are currently facing tremendous financial and operational pressure, coming from multiple directions, that threatens their long-term viability. Since the start of the pandemic, NFPs have faced a workforce recruitment and retention crisis, increased costs, and lost revenue. In addition, there has been an acceleration of emerging technologies creating new ways to deliver the same service, which is creating more competition from traditional organizations and disrupters.

The majority of NFPs received funding from CARES Act programs such as the Paycheck Protection Program (PPP), Employee Retention Credit (ERC), and Provider Relief Funds (PRF), as well as state and local government grants and private donations to sustain operations. Most NFP organizations will say they did not receive enough funding to help with the ongoing impact on operations; decreases in utilization, changes in service population, discontinued grants, increases in the cost of doing business, or a combination of all those factors. On Jan. 30, 2023, the Biden Administration announced it will end the public health emergency (and national emergency) declarations on May 11, 2023. NFPs must start to come to grips that this is the new normal. Organizations will need to adapt to this new normal, otherwise they will risk dying a slow death.

NFPs will have to make bold moves, while maintaining the delicate balance of mission, financial sustainability, and autonomy. Any strategy selected would be easier to choose if only two of the three factors needed to be considered. Any organization could easily remain autonomous and promote its mission if financial sustainability wasn’t a risk. Similarly, any organization could easily reduce costs by removing its administrative infrastructure if losing autonomy was not a risk.

One of the many ways for NFPs to maintain the delicate balance of mission, financial sustainability, and autonomy is through a revenue diversification strategy. Revenue diversification means creating new income streams by combining existing and new products or services with existing or new customers. For example, grocers now accommodate online shopping and curbside pick-up. Many NFP organizations already are diversified, in that they have multiple service lines. Your focus should be on growing the offerings to the individuals you already serve, while expanding offerings to those who are not currently consumers of your organization’s services.

When considering a diversification strategy, consider the types of services that individuals are receiving from other organizations, such as therapy services for healthcare and human service providers, certificate programs for educational providers, etc. Also, think about need for services not being provided by anyone at the current time or in your service area. Consider whether you could provide your current services to a population similar to the ones you already serve. For example, if you have historically focused on servicing families of heart transplant patients, consider other major organ replacement; instead of focusing just on veterans at risk of being homeless, also consider ex-offenders at-risk of becoming homeless. In addition, your focus can also be on expanding service areas to geographies underserved by your mission.

Discussion of revenue diversification strategies should and will make Board members uncomfortable, as many will view it as mission creep or worry about the impact on autonomy. Discussion will have to be geared towards the idea that the diversified services are being proposed to protect the mission and the organization currently and in the future.

Any consideration of revenue diversification should also be analyzed from a business case or, what I like to call in the not-for-profit sector, mission case. Questions that should be addressed include:

  • How does it relate to our mission?
  • Where will the services be provided?
  • Who will we be providing services to?
  • What is the current need for services?
  • Who is already providing that service?
  • What is our target revenue, what will we charge; and how will we get paid for the services?
  • What are the associated expenses, will service provision be financially viable and when?
  • What is the initial investment of working capital and where will those funds come from?
  • What is our current capacity to provide this service?
  • What could be the unintended consequences of performing this service, such as alienating donors, irritating peer organizations, or losing focus on your current programs?

In the end, even if the strategy does not move forward to the implementation stage, it should not be seen as a failure. Lessons learned from the exercise may be beneficial to future endeavors that follow. As a not-for-profit organization in 2023, you have will have to be resourceful and innovative to advance and protect your mission for future generations.

If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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