March 24, 2015

7 Income Errors that Cost Big Bucks

A pie chart illustrated how the nonprofit sector earns cash on the overhead screen. Seventy people guessed which income source represented the largest slice. CEOs, senior staff, students, and professors who taught nonprofit master-level classes filled the room. When they were ready, I listed each category and asked which was the biggest. Only four people got it right. I’ve repeated this exercise at many presentations with similar results.

A lot of misinformation exists about nonprofit income. It exists outside the sector, among the general public and it creeps into the thinking of boards and donors. It resides deep within the sector in groups where I present. In contrast, ingenious CEOs and EDs consistently find solid revenue knowledge—even if they don’t label the streams the same as in 7 Nonprofit Income Streams. Smart leaders know how their missions are funded, their salaries paid, and why others provide money—the ingenious work with facts.

Clarity breeds success. Does clarity really make that much difference? Yes. If you fear drowning, and many nonprofits do, it matters if you swim toward the big island or the rock that submerges at high tide. You do great work. You deserve income to do it.

What Does Misinformation Cost Us?

Plenty. Half-truths and errors about income lead many to spend inordinate amounts of resources chasing low-return opportunities, such as grants or donations from community leaders with full dance cards. Misinformation is at the heart of high development director turnover rates. It prevails in the thinking of discouraged nonprofits—they believe that nothing they do will provide adequate income.

Every year I receive multiple grant-writing requests. Most come from groups that believe grants represent their secret solution to success. For those willing, I help them use grants as a tool to tap other revenue streams and to improve their infrastructure. Grants almost universally work best as “accessories.” They make you look wonderful but don’t cover basics, such as salaries and utilities. That is, they leave you naked in important places.

If it is your goal to be a sustainable nonprofit, start with the facts. (And if it’s not your goal, why not?) Remove misinformation. Help people to challenge hearsay by asking for the whole story. Here are seven common fallacies to eradicate.

1. We can get a grant for that.

This assessment is also known as the PBS challenge. If you listen to PBS or other public media, you hear large foundations being credited for support. Listeners often forget the conclusion of these announcements. “Thanks to viewers like you.” These conclusions refer to individual donors—the largest source of donated income. People get excited when they learn that 100,000 grant sources exist. They forget that grants fund 1.7 million nonprofits in North America plus NGOs elsewhere. Is it possible that you already received your likely share of grant income?

2. The largest source of nonprofit income is individual donations.

This statement is false. Mission earned income, the sales of products and services related to your mission, provide the sector’s largest revenue source. It’s almost twice as large as individual donations, even when including bequests.

3. Bequests are best.

You know that bequests average $70,000. They are lovely and available to all nonprofits that consistently seek them over time, i.e., plan on seven years to see a harvest. But are they the best? Not when you consider that it’s the final gift you’ll get from that individual

4. People will fund your needs.

Donors and customers seek to obtain what they provide nonprofits income to solve their objectives—which, when you show them how your goals overlap, means resources for you. We are hardwired to help, but we do it to meet our  objectives.

5. You can believe everything you read in the press about nonprofits.

In today’s paper, a notice appeared that a nonprofit netted $25,000 on a new event, that grossed $100,000–as a good thing. Standard sector guidelines recommend net earnings of $50,000 on a special event, so while the event raised funds, the paper had not feature a model to emulate. Large gifts make headlines, but the investment and backstories remain untold.

6.  We’ll have success, just like them.

Maybe not. For individual donations, some groups start with superior advantages, such as universities, hospitals, and the performing arts. Here donor cultivation events can be created whenever they open their doors. At the same time, all groups can benefit from seeking individual donations. Some experience distinctly easier times filling their pipeline with potential donors.

7. Low overhead is critical.

I’ve written elsewhere about how for many nonprofits, overhead is too low, not too high. Except in the most egregious cases, evaluating nonprofits by their overhead rate is useless. Nonetheless, many nonprofits experience overhead strangulation since the measurement continues to hold sway in and outside the sector.

Know What You Know

Even when you know the facts, it can be hard to blow up misinformation. In the movie, The Hunt for Red October, hero Ryan has an epiphany that the captain of a Russian submarine is defecting—even though it looks like he’s preparing to attack. Ryan blurts the insight in the middle of a meeting with top military brass. It doesn’t sit well. When Ryan stands his ground as multiple-star general attacks, “What do you know, you’re only an analyst?” To override similar resistance, provide proof.

As a nonprofit insider, you understand nonprofits and income generation even though you get some answers wrong. You recognize it’s harder than it looks. You understand the importance of relationships. You know that sometimes time can do what words can’t. It is time to recognize what income confusion costs. Your work is too important to lack income to do it. Share the facts and stand your ground.

To fill the void made by removing misinformation, hearsay, and errors, your leaders need solid information about creating a sustainable revenue strategy. Engage your staff and board by reading 7 Nonprofit Income Streams.  You’ll discover new income opportunities and learn to create to sustain your nonprofit as a team.

For more about nonproift income opportunities, click here.


Karen Eber Davis

Karen Eber Davis provides customized advising and coaching around nonprofit strategy and board development. People leaders hire her to bring clarity to sticky situations, break through barriers that seem insurmountable, and align people for better futures. She is the author of 7 Nonprofit Income Streams and Let's Raise Nonprofit Millions Together.


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