Evaluate Revenue Diversification to Reduce Risk

CPAs & Advisors

Jessica Rolfe
Jessica Rolfe CPA Principal CPAs & Advisors

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Most nonprofits face the struggle of fulfilling their mission with very limited resources. Organizations are always on the hunt for new revenue sources, which are often in the form of contributions and grants. Some nonprofits are lucky enough to have a significant revenue source or donor that consistently provides them with funding. Others have a well-known special event that generates a large amount of its annual contribution revenue. While consistently receiving a substantial chunk of money from a single source or event each year seems ideal, could it be a concern? 

Revenue concentration could be considered one of the most significant risks facing nonprofits. When considering sustainability, nonprofits need to determine if they could survive if this key revenue source were suddenly gone. Diversification is critical for a financially sound organization. COVID-19 has shown us that unexpected events can arise at any time and severely affect and quickly reshape our businesses. By not placing high reliance on a small number of revenue sources, an organization increases its chances of an easy recovery should any major changes in funding levels occur from any source.

Some questions to consider when looking at the organization’s revenue:

  1. Is more than 25% of our revenue coming from a single source or event?
  2. How financially stable is the funding source? Are there concerns that funding could decline or be discontinued?
  3. Could we survive if we lost the revenue from one of our large sources?
  4. How can we better plan for a change in significant revenue sources or better diversify our revenue streams?

While having a large revenue source is not a bad thing by any means, it is essential to periodically evaluate that source and its ability to continue funding the organization. By staying informed regarding these sources, the organization can better ensure its ability to carry on if changes in these sources were to occur.

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