Soapbox Engage Blog

As a nonprofit professional, you probably find motivation in your organization’s mission. This mission not only gives you a reason to work hard each day, but it’s also why your organization exists. Therefore, you likely spend a lot of time planning for fundraising efforts and figuring out new ways to make an impact.

Because you spend so much time earning revenue, you’d think it’d be a top priority for most nonprofits to review and manage their various sources of revenue. However, many professionals get so swept away in programming—not without reason—that financial management activities sometimes take a backseat.

Tracking revenue is important not only for reporting purposes, but also for your organization as a whole because it helps you organize the funds you bring in and further increase your impact.

In this article, we’ll walk through four tips to help your nonprofit fund its mission by managing revenue, including:

1. Categorizing your nonprofit’s revenue sources.
2. Diversifying your nonprofit’s revenue streams.
3. Tracking the purpose of each revenue source.
4. Correctly reporting each contribution.

Developing your nonprofit’s fundraising strategy and managing your finances work side by side—one helps you to maximize the revenue you bring in, and the other allows you to organize that revenue so you cover all necessary expenses. Working together, both give your organization the opportunity to pursue its mission.

1. Categorizing Your Nonprofit’s Revenue Sources

Most nonprofits receive funding from several sources that together make up your overall revenue. The first step to effective financial management, then, is to organize your revenue sources so you know how much money is coming in overall and how much of it is sustainable.

Although every nonprofit will have a unique set of revenue sources based on your individual fundraising activities and goals, most revenue sources fall into one of five categories:

• Individual contributions. Both major gifts and small-to-midsize contributions will fall into this category. These donations come from specific fundraising campaigns, through your website, or via individual solicitations.
• Corporate philanthropy. Any funding provided by a business—such as matching gift revenue, volunteer grants, in-kind donations, sponsorships, or profit sharing—falls under this category.
• Event revenue. Many nonprofits host galas, auctions, fun runs, or other events because these opportunities often have a high ROI and contribute toward a nonprofit’s annual fund.
• Service fees. If your organization requires fees for services or offers a membership program, you’ll add another revenue stream through these fees and member dues. Nonprofits who have service fees generally earn a large portion of their annual funding from these sources.
• Grants. There are a variety of grants available to fund specific initiatives at your organization. Generally, these grants come from foundations, companies, or governing entities. When you submit grant applications, you often need to explain in detail how you’d use the funding to further your mission, making this source a great opportunity to fund specific programs.

When you receive this revenue, you’ll need to categorize it for two different nonprofit departments: fundraising and accounting. Your fundraising team will likely be interested in categorizing each of these types of fundraising by campaign. That way, they can make adjustments to maximize each fundraising campaign they launch.

Meanwhile, your accounting team will record this revenue in the earned revenues section of your chart of accounts. This section can be further subdivided into the categories that make the most sense for reporting at your organization. This means it might be similar to the categories outlined above or using an entirely different model.

2. Diversifying Your Nonprofit’s Revenue Streams

When nonprofits have multiple revenue sources coming in throughout the year, that revenue generally creates more sustainable funding.

It’s especially important to consider the ways you can sustainably support your annual fund, which is used for both programming and your administrative expenses. While you can dedicate restricted funds like grants and major gifts to your programs, it’s harder to find large sums for your annual fund.

It’s dangerous to rely too much on any one revenue source, though. For example, imagine you get 50% of your funding for a program from a specific grant. If another organization won that grant one year, how would you make up that funding? A more diverse distribution of revenue will help increase your organization’s financial security.

A few ongoing fundraising ideas that your nonprofit can use to diversify your revenue include:

• Online shopping. You can easily turn the popularity of online shopping into an ongoing fundraiser for your nonprofit. You could create a charity store and sell merchandise branded to your nonprofit. Or, register with an online shopping fundraiser platform so that when supporters shop at participating retailers, a portion of their total sale goes back to your organization.
• Matching gifts. Corporate giving research shows that 84% of donors are more likely to contribute to a nonprofit when they know their gift will be matched. Many major corporations will match their employees’ nonprofit donations, so your organization can maximize the value of individual contributions by promoting matching gifts to supporters.
• Google Ad Grants. Google Ad Grants are a unique type of grant for two reasons. First, any nonprofit that meets the eligibility criteria can secure the grant. Second, Google Ad Grants provide a way for nonprofits to advertise for free, allowing you to reduce your marketing budget and put more funds into other areas of your organization.

Also, consider adding these ideas onto existing fundraising opportunities. For instance, you can sell branded merchandise at a fundraising event to give attendees another opportunity to donate. Asking your supporters to check their eligibility for a match when they donate through your website can amplify your online giving revenue. Finally, Google ad grants can help gain visibility for any and all fundraising campaigns. You’ll maximize your funding and diversify your revenue streams at the same time with these types of approaches.

When you budget for your revenue, be realistic about your chances of receiving each revenue source. Accountants suggest multiplying revenue streams by the chances of earning that funding to create a more realistic and conservative budget.

3. Tracking the Purpose of Each Revenue Source

In addition to keeping track of where your revenue comes from and how much you’re bringing in, your organization also needs to know what the funds from each source are used for. Tracking the purpose of each of your funding sources is important for three reasons:

Achieving Fundraising Goals

When your nonprofit sets fundraising goals, you need to have a clear understanding of what your nonprofit wants to accomplish with the funding and how realistic the goal is. Set goals that are ambitious enough to further your impact and meet your most important needs but are still within your capabilities to achieve.

For example, if you’re trying to start a new program, you should first consider if you have the capacity to take on additional financial risk right now. For a large project like this, you’ll probably want to launch a capital campaign to raise the appropriate funds.

For these types of large campaigns, a gift range chart will help you determine how much to solicit from major and mid-tier donors. Then, you can move onto the public phase of the campaign to fill in the rest with smaller contributions.

Accounting for Restricted Funds

Restricted funds are an important consideration for nonprofits, both for tax accounting and for accountability to stakeholders. Any contribution that is earmarked for a specific purpose is considered restricted funding as your nonprofit agrees to use the money for that purpose only.

Restricted funds most often come from two sources: major gifts and grants. Sometimes a donor or foundation brings up the restriction so they know exactly what the large amount they’re contributing will be used for, and sometimes a nonprofit self-restricts funds to achieve specific program goals.

When you track restricted funding, you’ll need to separate permanently and temporarily restricted funds. A permanently restricted fund usually takes the form of an endowment, which an organization doesn’t spend directly but uses to garner interest, and the interest is only used to fund a specific program. Temporarily restricted funds are limited by time or purpose, but once the time expires or the goal is met, leftover funding is released from restrictions.

Ensuring Budgeting Needs are Covered

Lastly, tracking the purpose of each revenue source helps your organization compare your planned versus actual revenue and expenses. For example, if you’ve created your budget based on the assumption that you’ll receive a specific grant, but you end up not winning it, you should make sure that revenue can be made up somewhere else. This will ensure the program that the grant would have supported still gets the funding it needs.

Compare your budget and your statement of activities to determine whether your planned versus actual revenue and expenses match up. If you find major discrepancies, you can make adjustments around the mid-year mark. Then, consider where the variation took place so you can make more accurate predictions next year.

4. Correctly Reporting Each Contribution

If you’ve reported on your nonprofit’s finances in the past, you know that it can be complicated. You need to follow the generally accepted accounting principles (GAAP) while ensuring restricted funds are accounted for and expenses are covered. Before you know it, you’ll have to choose your tax forms and categorize your expenses.

However, all of these things can be simplified with the right accounting system. When you have a detailed chart of accounts and pre-built statements, you should be able to pull the information you need easily.

One challenge many nonprofits run into is recording in-kind contributions. To follow GAAP standards, you’ll need to estimate and report the monetary value of any donated goods—or services. Determining the value of a new couch donated to your organization when the tags are still attached is fairly easy. But when a lawyer provides services to your organization, and you need to track the hours they spend working as well as their average rate, reporting becomes more challenging.

Managing the revenue your nonprofit brings in will help you to make more accurate fundraising estimates and use the funds you recieve more effectively to make a greater impact through well-funded programs and projects. Organizing your revenue streams, diversifying sources, tracking the purpose for funds, and reporting on contributions accurately will help your nonprofit to succeed financially, which in turn funds your mission.