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Diversified Revenue: Best Practice or Financial Myth?

In a recent blog post, “Shattering the Myth About Diversified Revenue,” the Nonprofit Finance Fund’s Clara Miller proposes that seeking a more diversified funding base is often more of a burden than a boon to non-profit leadership, and leads to staff and board burnout. Rather than a “best practice,” she sees fund diversification as a “financial myth.”

I must say, I plead guilty to having advised many nonprofit clients that they must look toward a more diverse funding base in order to enhance sustainability. Miller provides an example of an organization with very diverse revenue sources, including 15 percent of revenue from “the dinner dance, the golf outing” and other labor intensive strategies. Like all best practices, fund diversification should be applied differently in different organizations. I would agree, for example, that it may not be worthwhile to add events to the mix if they yield relatively little for the work involved. Indeed, my general advice about events is that they must have value as a means of building the donor base permanently, not as one-offs with no lasting impact.

But fund diversification is often a good idea. I have seen too many instances where over-reliance on a small number of funders has skewed programming decisions, adversely affected the balance of power on the board, and made the organization vulnerable to sudden changes in the priorities of the funders. I have also seen lack of funder diversity as an issue in founder transition- when the organization relies on revenue from a few sources with which the founder has built close relationships, it is that much harder to make the change in leadership. Whether or not funding diversity is fundamentally counterproductive, or a necessary financial strategy, it works best when applied thoughtfully with a well-identified objective.

 

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