Financing Nonprofit Organizations by Garcia-Rodriguez Inigo; Romero-Merino M. Elena;

Author:Garcia-Rodriguez, Inigo; Romero-Merino, M. Elena;
Language: eng
Format: epub
Publisher: Taylor & Francis Group
Published: 2020-01-18T00:00:00+00:00

Part II

Revenues, Funding, and Financial Health

8  Revenue Diversification, Growth, and Stability

Grace L. Chikoto-Schultz and Narttana Sakolvittayanon

Introduction

In order to survive, all organizations must acquire and maintain the resources they need (Pfeffer & Salancik, 2003). In the case of nonprofit organizations (NPOs), the general recommendation has been to adopt a revenue diversification strategy, as part of their revenue-seeking behavior. Financial crises have demonstratively shown the uncertainty and instability of the economic environment and the resultant grave impacts on many NPOs. For example, in discussing the effects of the weak 2008 U.S. economy on NPOs, Chris Abele, then-president of the Argosy Foundation, believed that many NPOs would not survive the economic conditions (Schuyler, 2008). His prediction was confirmed by the closure of a large arts group, the Milwaukee Shakespeare (Milwaukee Shake), because its principal funder, the Argosy Foundation, was unable to honor its grant commitment of $925,000 of Milwaukee Shake’s total $1.3 million expected budget for the 2008–2009 season (Milwaukee Journal Sentinel, 2008). Three observations can be made from this case: first, the Milwaukee Shake’s financial position was characterized by a serious case of resource dependence, in this case extreme revenue concentration. About 90% of the NPO’s revenue came from just one source. Second, NPOs need to ensure they have sufficient funds to be able to achieve their missions in the short term. And three, NPOs need to adopt measures and strategies that enhance their ability to withstand external crises and shocks that threaten their financial stability.

A revenue diversification strategy is meant to mitigate against such environmental conditions of uncertainty and scarcity by relying on diverse sources of income and providing more financial cushion for the organization. Revenue diversification is generally cited as a key strategy for achieving financial stability (Carroll & Stater, 2009; Chang & Tuckman, 1994; Froelich, 1999; Kim, 2017), effectively lowering the risk of financial crisis and improving the odds of organizational survival (Altman, 1968; Gilbert, Menon, & Schwartz, 1990; Ohlson, 1980). However, a revenue concentration strategy, which relies on fewer revenue streams, is not without its merits. Others have found empirical evidence in support of revenue concentration as a strategy for enhanced efficiency (Frumkin & Keating, 2011), and increased financial growth or capacity (Chikoto & Neely, 2014; Lin & Wang, 2016; von Schnurbein & Fritz, 2017).

However, a recent meta-analysis of revenue diversification research found “a small, positive, yet statistically significant association between revenue diversification and nonprofit financial health” (Hung & Hager, 2019, p. 5). The authors concluded that the overall “effect is small, with negative and null effects largely counter-balancing the positive assessment” of revenue diversification on financial health (Hung & Hager, 2019, p. 21). This same meta-analysis also found that whether financial health was measured as “static capacity or dynamic sustainability measures” (Hung & Hager, 2019, p. 22), as observed by Prentice (2016), it did not influence the effect of revenue diversification. What did matter was whether revenue diversification was measured as granular or aggregated, as this distinction affected the financial health effects as observed in Chikoto, Ling, and Neely’s (2016) study.

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