The Nonprofit Guide to Creating a Balanced Funding Portfolio

The great Warren Buffet once said: “If your salary is your only source of income, you are one step away from poverty.” Some may see this quote as an exaggeration, yet it contains a nugget of wisdom that all founders and directors of nonprofit organizations should follow: channel multiple sources of funds. Never rely on just one. 

When nonprofits depend on a singular source of funding, they put themselves at risk for financial turmoil if that monetary stream is reduced or cut. Contrarily, an NPO that secures a balanced funding portfolio (something aforementioned Warren Buffet knows a thing or two about) will remain financially afloat even if an income source runs dry. 

This post will explain the virtues of building a diversified portfolio for funding, and methods to secure one so your organization can stay many steps ahead of financial trouble. 

What Is a Funding Portfolio?

A funding portfolio is similar to the concept of having a balanced investment portfolio. It simply refers to the collection of multiple revenue streams that a nonprofit organization uses to fund its initiatives and operations. It functions as an ecosystem of sorts, with each revenue source contributing to a dynamic structure that covers all of your nonprofit’s expenses and financial goals.  

Examples of Fund Sources

• Grants—Corporations, foundations and government agencies may award grants.
• Individual Donations—One-time or major gifts, as well as monthly giveaways can all help nonprofits garner monetary sources.
• Earned Income—Revenue from program fees, consulting, and even product sales can serve as an income source.
• Corporate Sponsorships—Cash or in-kind support from adjacent businesses can fund a nonprofit.
• Government Bonds & Contracts—Payments made by delivering services can also inject liquidity into a nonprofit.
• Fundraising Events—Galas, walk-a-thons, or even online campaigns can raise significant capital for nonprofit organizations.
• Memberships/Subscriptions—Fees for access to benefits, content, and services, can generate a steady stream of revenue that can fund both short-term and long-term growth. 

Benefits of a Diversified Portfolio

• Stability—Income diversification safeguards your nonprofit organization from market volatility and vulnerability if certain revenue streams cease.
• Flexibility—A diversified portfolio allows for strategic pivots during economic downturns or in the event of policy changes.
• Long-term Growth—A varied source of incomes creates new opportunities and opens the path for new partnerships, which makes your long-term goals and investment objectives easier to achieve. 

A Deeper Look at Common Funding Sources for Nonprofits

Above we mentioned seven common sources of funding for nonprofits. These sources aren’t the only options for NPOs, but they’re most sought-after because of how reliable they are. That said, here’s a deeper breakdown of each funding source. 

Grants

One of the main benefits of grants is that they offer significant funds that help with the starting costs nonprofits face. They’re great for covering the expenses associated with launching new programs and initiatives. 

Grants are typically project-specific and require detailed applications and reports from nonprofit staffers. That said, many organizations seek out grant opportunities, making them competitive to secure. 

Individual Donations

Major gifts one-offs don’t serve as fixed income, but they can produce generous amounts of liquidity for NPOs. For example, the ALS Associations “Ice Bucket Challenge” raised an astonishing $115 million from individual donors, making it one of the most notable and impactful grassroots campaigns of the 21st century. Ultimately, the movement illustrated the financial power that donations can bring. 

Monthly donations serve as a recurring funding source, which can be particularly beneficial during market downturns when static donations may be harder to come by. They also provide a certain amount of stability and reliability for nonprofits since these donations provide regular and consistent payouts.

Earned Income

Some nonprofit organizations earned direct revenue from program costs, consulting fees, and product sales. This income stream isn’t suitable for all NPOs, but for the right organization, these methods can yield substantial and consistent revenue. 

For example, Goodwill Industries is able to fund their mission and operation by means of their thrift store chain, which has become a household name throughout North America. The organization generates $4.8 billion annually through the sales of thrift items, making them one of the most profitable nonprofits in the world. 

Corporate Support 

Corporations may provide sponsorships, employee giving, or matching gift programs. Nonprofit organizations aligned with these corporations can secure sponsorships that allow them to fund their missions and programs. 

Fundraising Events

Nonprofits can raise healthy funds through community events such as walk-a-thons or galas. The funds generated from such gatherings can go directly into their pockets, which staff members can reinvest into their operational expenses. 

However, setting up such events takes significant upfront investment, asset allocation, time, and yes, money to make such events possible. 

Memberships or Subscriptions

Certain organizations such as museums or public radio stations often use dues-based models to secure funds. In many instances, they provide members with access to exclusives, whether that be content, services or specific benefits. These exclusives are usually only accessible to paying members—subscribers. These subscriptions, when there’s enough of them, provide a steady income stream that nonprofits can rely on to fund their programs and functions. 

Why Diversification Matters

We’ve discussed some of the benefits of diversification above. The most apparent one is the fact that it removes vulnerabilities nonprofits face if they lose their sole source of income. However, there are some additional advantages that come with having a diversified portfolio. 

Absorbs Fluctuations

Funding cycles are hard to track. A foundation known for providing grants may decide to shift its priorities, or a market downturn due to economic instability could restrict their grantmaking activities. 

A balanced portfolio can help nonprofits weather these storms since they can lean on other streams of money if grants or sponsorships become unavailable. 

Builds Resilience

Closely-related to the previous point, diversification helps keep NPOs resilient against external events. That means a steady flow of revenue despite new government regulations, economic recessions, or the sudden loss of a donor. 

Enables Strategic Planning

A mix of assets makes a reliable budget and long-term planning more feasible. This helps nonprofit organizations channel more of their resources into their mission and impact. 

How to Assess Your Current Mix of Assets for Funding

A quick consideration of the benefits listed so far make it clear why NPOs should invest in a mix of assets. Changes in market conditions (such as market fluctuations), changes in government policy, and shift in grantmaking priorities make it vital to own a diverse portfolio for income. 

Right about now, you might wonder where your organization falls in terms of its revenue sources. Some of you may immediately realize that you’re too dependent on a single source of income, and need diversification in your portfolio. But it’s important to assess your current standings and the opportunities ahead of you before make decisions related to financial planning and revenue strategy.  

Review Past Performance and Revenue

First off, look at your financial history and past performance. The question you want to answer is: “Where has our money been coming from in recent years?” To answer that question, analyze your revenue sources in the past 1-3 years to uncover patterns and insights. You want to hone in on the percentages of your total revenue coming from each source. 

In many cases, the answer will be apparent, but some instances will require some digging.

You can use tools such as Google Sheets or Excel to break down and visualize these numbers. 

Identify Overreliance or Gaps

This step is important. Your staff members must uncover whether you’re too reliant on a particular source of coming. Do you depend on just one grant from a foundation, or donations from a third-party? 

If the answer is yes, your organization should review and implement additional revenue sources. Look for “natural fits”, potential sources of revenue that fit your nonprofit in its current form. For example, if you offer exclusive benefits or content, you package these offerings into a paid membership or subscription. Or if you can act as a consultant, you can earn income or secure a government contract. These opportunities can inject liquidity into your nonprofit in addition to your primary revenue streams, perhaps, even superseding it. 

Evaluate Cost, Risk Tolerance, and Sustainability

Before pulling the trigger on a particular choice, it’s crucial to evaluate your organization's risk tolerance. Yes, you have to approach these income sources like someone making investment decisions or considering an investment strategy. 

The reason for this is that some revenue streams are low-risk, while others are high risk. Low-risk revenue sources are more reliable and cost-effective, requiring little upfront investment to make them viable. On the other hand, high-risk revenue streams require high investment from the start and the income they generate may depend on uncontrollable variables, such as attendee turnout (in the case of fundraising events). It’s important to factor in your “risk appetite”, because the level of risk you can tolerate will influence the type of investment you make when it comes to pursuing a revenue source. 

Strategies for Creating a Balanced Investment Portfolio

Your organization must view your shift into choosing additional revenue streams as a form of rebalancing. The goal shouldn’t be to completely abandon an existing revenue source, or to adopt a new one that has the most revenue potential. Rather, view it as a combination of looking present and future opportunities that best match with your organization’s mission and values. 

Strengthen What’s Working

Your nonprofit likely possesses at least one successful funding stream (you probably wouldn’t be reading this article if you didn’t). Perhaps it’s a corporate sponsorship or recurring donation. If so, find ways to optimize it so that it continues to serve your financial goals. 

Explore New Revenue Streams

Next, look at new funding sources that are a natural fit for your nonprofit. For instance, if your organization has strong branding, you might consider venturing into product sales (like the aforementioned Goodwill) or a service program for which you can charge a fee. 

Pilot Small Initiatives

For higher risk revenue opportunities, you might not want to delve into them immediately, especially if they’re cost-prohibitive or require significant effort to launch. For example, fundraising events, although having the potential to be profitable, carry high upfront costs and labour. A better way to test this initiative would be launching a virtual event. This is a low-cost method that would take far less time and effort than launching a live event that may not recoup its cost in revenue. 

Build Systems for Retention

Certain revenue sources can benefit from having systems in place. For example, having a system to improve donor retention can help your organization pull more donations, which would mean more funds overall.

Invest in Capacity Building 

It’s also important for nonprofits to invest in their capacity to build revenue streams. A certain amount of infrastructure and employee training is needed to facilitate the acquisition of new revenue streams. This makes it crucial for your team to set tools such as CRM systems, grant writing workshops, or donor engagement software. Putting these tools in place makes it easier for your team to acquire different asset classes and maintain these revenue sources, setting the stage for portfolio rebalancing. 

Tips for Managing Multiple Funding Streams

Of course, an influx of revenue requires strong management. Proper asset allocation becomes paramount, especially to ensure that extra revenue is properly reinvested into organizational expenses, and not used for personal gains. That said, there are some steps nonprofits can take to ensure money is being handled ethically and strategically. 

• Assign clear roles—Designate roles to specific team members or volunteers who can oversee and monitor each revenue stream, both old and new. This helps ensure proper asset allocation, accountability, and reduces burnout.
• Track revenue and performance—Set up dashboards or spreadsheets to track revenue (including sales and subscriptions), costs, and above all, ROI. You’ll need to know rather quickly whether a particular revenue stream is truly working for your organization and contributing to your investment goals.
• Tailor communication—Write communication strategies for each type of funding. This will enable you to keep tabs on how these funding sources are performing, and what actions your staff may need to take to optimize them.
• Integrate reporting—Incorporate integrated reporting systems to track the impact and outcomes of all your funding streams. This keeps your whole team in the loop as to what’s occurring financially, providing a streamlined and effective documentation system. 

The Balancing Act of Having a Balanced Portfolio

Diversification is the answer to nonprofits looking to stay afloat amidst market fluctuations, policy changes and other events. A balanced portfolio is a long-term investment in the health and sustainability of your organization, ensuring that your nonprofit can generate funds for the long haul, regardless of what events may occur. 

Hiring a financial advisor can help your team find the best type of funding for your organization, even if it's just for informational purposes. With the right guidance, you can propel your nonprofit to make higher returns from its investment decisions, and a portfolio that’s unshaken by market volatility or legislative changes. 

Frequently Asked Questions

Q: How many funding sources should my nonprofit have?

A: There’s no “right” amount of funding sources to have. However, financial planning experts suggest having at least three major funding streams to reduce risk and reach your financial goals. 

Q: What if we’re too small for diversification?

A: Even adding one additional revenue stream minimizes risk, so start small. As you optimize and grow these streams, you can use some of these funds to open and launch new revenue sources. It may also help to speak to a financial advisor who can recommend some additional ways to create a more balanced portfolio. 

Q: How often should we review our funding mix?

A: Consider reviewing your funding portfolio at least once every year. Conversely, you can review your portfolio any time your organization undergoes significant changes.