One of the most important things that a nonprofit can do to build a sustainable organization is to develop a robust fundraising system. Funding for nonprofits typically comes from three sources: donations, grants, and program revenue. Each of these sources has benefits and limitations, but a critical thing for nonprofits to remember is that they must diversify their funding sources to ensure budget continuity in case any funding source goes dry.
Most public charities generate a majority of their funding from public donations. These donations can be from an individual, a company, or from another public charity. Donations from individuals are typically tax deductible to the donor, but the tax benefit is typically not the only reason an individual chooses to support a nonprofit. The most successful public charities communicate clearly about their vision for impact and the reasons why they are raising funding. The most successful fundraising campaigns give donors clear information on what their funds are supporting, and follow up with donors on the success of the programs that utilized the funding. The ultimate goal is to build an enthusiastic fan base of donors giving small, sustainable amounts. Then, you won’t find yourself dependent upon major gifts.
Grants, while they often provide larger funding sums to support specific programs, are a less reliable source of funding and should be considered supplemental to individual donor gifts. Grant funding is extremely competitive and typically only the top ten percent of nonprofits (by program size, history, or other criteria) in any given area of impact receive grants. Like relying on a small group of donors each giving large sums, the risk in grant funding is that in any given funding cycle your nonprofit might not get chosen as the recipient. Additionally, grant funding typically requires a very specific designated use that is aligned with the goals of the granting organization, with detailed reporting and oversight.
Program revenue is revenue generated through the program activities of a nonprofit. In order for the IRS to recognize the revenue as legitimate, program revenue must be directly related to programs that drive the organization’s tax exempt status, e.g. tickets sold by a nonprofit theatre, or tuition and fees generated by a school. Not all nonprofit business plans will include the generation of program revenue, but those that do often find it to be a good source of sustainable income. Another important point about program revenue is that, because it’s tied directly to the organization’s purpose, it is nontaxable just like donation.
Revenue generated from an ongoing activity that is not directly related to a nonprofit’s programs, however, is considered “unrelated business income”, or UBI. Unrelated business income is not a good revenue model for most nonprofits and cannot make up a significant portion of a nonprofit’s revenue regardless, or else that organization’s tax exempt status may be put in jeopardy (as it would be better characterized as a for-profit company activity). In addition, net proceeds from UBI are fully taxable to the nonprofit.
For most startup nonprofits, building a broad donor base of individuals that can give at a variety of levels is the best way to sustainably grow your organization’s programming resources. Supplementing that broad base with major-gift givers and grant funding is merely the icing on the cake. Your donor base is not only your source of funding, but of word of mouth advocacy, in-kind donations, volunteers, and other non-financial resources. For more information on how to create a successful nonprofit, check out some of our other articles!