Thinking about new revenue streams? Thoughts on strategic fundraising

This episode talks about evaluating new revenue streams and strategic fundraising. 

Transcript

SPEAKER_00 0:03

Welcome to Navigating Nonprofits with Lifeboat Accounting. My name is Amity, and I'll be your captain today as we discuss hot topics around accounting for nonprofits. Lifeboat Accounting is an accounting firm that works exclusively with helping nonprofits stay afloat. We cover everything from accounting to tech stacks, to strategic planning, 990s, grants, board development, and staff training. When I speak at conferences or board meetings, folks have always suggested to me that I needed my own podcast to tell all my stories and share my experience. So I'm excited to dive right in and to get to some of my favorite topics and share some special guests with you. Welcome to Navigating Nonprofits with Lifeboat Accounting. My name is Amity and I'll be your captain today as we discuss hot topics around accounting for nonprofits. Today we're going to be discussing new revenue streams and strategic fundraising. Now, this can be a hot topic for a lot of organizations because a lot of the times organizations start small and they have a few donors. And as they expand, they may have some program revenue. And as they expand more, that program revenue may not cover the costs of operations, and therefore you have to come up with a new kind of fundraising model. And everyone's a little bit different. Some organizations are fully grant funded, others are receiving contributions, a little mix of grants, and then a little bit of program fundraising. And a lot of it is about uh security and diversification of revenue, and what does that look like from a level of comfort within the organization? Uh generally, if you're 100% funded by donations, you have risk when the economy goes down and people's cost of living goes up, the amount of donations may hit you hard. Right now, if you are grant funded, it may be a little bit more challenging or more competitive for grants. And if you're federally funded, it's even more challenging at the moment. Um, and then if your program services is 100% of your revenue, that can also be a challenge too, if you know a national pandemic happens and you're not able to operate. So these are all kinds of examples that have occurred literally in the last five years that nonprofits are facing in regards to changing funding patterns. And so I figured I'd talk a little bit about strategic fundraising and a little bit about revenue streams today, uh, because I just recently recorded the podcast about strategic planning and budgeting, and obviously, revenue is kind of a big tool in that sense. So, what is strategic fundraising? It might be a new term to you. And to me, strategic fundraising is fostering and guiding outside financial support intentionally in order to best meet the needs of the receiving organization. It avoids complicated transactions or situations of low benefit for the amount of effort. And it's also about creating a clear strategy and plan to communicate and share with those who are responsible for fundraising. And it's also ensuring uh fundraising compliance for federal, state, and local regulations. It's planning for changes in tax regulations and charitable giving. And there's a bunch of different changes in charitable giving strategies, often depending on the economy. And it's also planning for changes in donor bases. If you have an aging population, how are you going to plan to replace those donations when those folks unfortunately pass? So there's a lot to this topic, and this probably could be a whole day-long conversation, too. Um, but like, for example, I had an organization receive a donation of real estate, and everyone's really excited about that. Um, and they're like, Yeah, we'll take the real estate, we'll sell it, we'll get half a million dollars, we'll do great, we'll use that money. And they accepted the donation of the real estate. Then they find out that actually there was some um soil that tested positive for some chemicals, and then also that there was an old outdated pool in the background that needed to be filled in before they could sell it due to the regulations in that specific city. And therefore, this poor organization has to find additional money to close out the costs of this building that they they inherited. Um and it literally almost took all of their potential earnings on this on this facility. And the reason why it was donated is because it wasn't selling. So if the organization had had a good gift acceptance policy and procedures to say no and had a little bit more knowledge about the situation, then they probably could have gotten in a better position. Um, another example is the gala conversation or the yard sale conversation or the fundraising event conversation. For some organizations, those things work well, but they also take a lot of manpower. So if you have a very, very small staff and they're spending all this time on this one event, unfortunately they're not spending the time that they need to on the programming and the mission. So that's kind of what I'm talking about in regards to just basic examples. Um there are different ways to give money, and I have this conversation a lot with boards because gifts are phenomenal. We love gifts, we love donations. But sometimes you can get in a situation where you have so many restricted donations or restricted grants or restricted funding funnels that it limits the organization's ability to pay for its general operations. And it is definitely a lot easier to fundraise for restricted gifts. Um, but we also need those unrestricted dollars as well. So unrestricted dollars are general operating support where the donor gives the money and just says, you guys use it where you see it needed, general operating support, and you know, use it as you see fit. Then there's restricted donations that have a specific purpose, like uh someone donates $100,000 to buy a widget, and you have to use that money specifically on buying that widget. You can't use it for anything else. And then there's permanently restricted items, such as endowments, where you can never touch the original principal that was donated, but you can use the earnings. Um, and then there's other things, they're like quasi-endowments and a whole bunch of others. That's a whole other conversation. But as someone who was an auditor in the 2007-2008 bubble, when that burst, there was a lot of places and a lot of organizations that had endowments. And they couldn't touch the principal, but on paper it looked like they had a bunch of money, but they couldn't make payroll. So we actually had to go back to the state, and we had to go back to donors and say, hey, I know you donated money specifically for this, but would you be willing to repurpose it so that this organization can survive? And I'm finding that now is a big topic too. With a lot of organizations, they feel like uh an endowment is the end result, like that's the definition of success. And I don't know if I'm convinced on that going forward. I think having more flexible investment pools would be a better option, especially for small organizations right now. Um, I recently wrote a post about this in LinkedIn if you want to go ahead and read that. Um, there's a lot of really good feedback from my peers on there as well, if you want different opinions. Um, so yeah, you can have money that's available to use for anything, money that's available to use for specific items, and then you have money that can't be touched, but you can use the earnings. And all of this plays into a fundraising strategy because it's good to have a good balance of whatever you need. Obviously, everyone wants a $10 million unrestricted fund. That would be phenomenal, and I wish that for every organization. Um, but those dollars tend to be the hardest to get. But you can also come up with fundraising strategies where you provide a menu of options to potential donors based off what the staff has said that they need for the next year. So if they come and they're like, hey, I want to do this really complicated gift, you'd be like, you know what, that doesn't really help us with our purpose right now. Or you can reword it with your development teams to say, you know, what we really need right now is X, Y, and Z. And here's our 10 options. So it's not a no, it's not denying a denotion donation or pushing anyone away. It just helps guide the organization in better conversations. Um, you can also get gifts that are gifts in kind, um, such as property, stocks, products. You can get services, you can also get a lot of donations of trusts, IRAs, and annuities. There's just so many different fundraising strategies, and I always encourage organizations to review their websites and make sure that they have all those listed as options that are easily clickable for donors to donate. One example I see over and over and over again is I will log into an organization to go update their books for the month, and I'll check their stock account at one of the large investment companies that they've set up. So, you know, someone can go on the nonprofit's website, they can donate stock right then and there. They have all the information to transfer the stock. A lot of those gifts, people don't even notify the nonprofit. It's like a surprise. And I can't tell you how many times I'll open up the investment portfolio to reconcile the month and bank statement, and all of a sudden there's like $15,000 there, and I'll call up the nonprofit and be like, hey, did you realize that someone donated? Do you know who? And they're like, no, we didn't know it was there. And it's like Christmas. So the way the easiest, the easier that you make donations happen for the donors, especially if it's stock gifts, I find that that's very beneficial to have that listed out. Same with endowments and bequests, or not endowments, same with bequests. Um, some of the challenges I see when people are kind of creating their fundraising strategy is that they have too many programs and events. There's too many fundraising initiatives, and the staff are they're they're very staff intensive or volunteer intensive, but there's a very low return. And I see this with growing organizations where the community yard sale or the golf event or uh the gala used to bring in five, ten thousand dollars, but as the organization grows, five to ten thousand dollars isn't much anymore. Um, that's all eaten up by staff costs. So things that happened in the past don't necessarily mean that they have to happen in the future as the organization grows. And then the question is for a lot of programs and events, is it fundraising or is it fundraising? Because sometimes fundraising pays off in the future instead of fundraising that happens now. So yeah, just double check and make sure that you don't have too many programs and events that are like high resources or slightly unfocused and channel that energy somewhere else. The other thing I see a lot is having way too many temp-restricted funds or restricted gifts, but not enough operating cash. And a lot of organizations allowing the donors to say what they're going to donate versus giving them a menu of options to choose from. Um restricted gifts take a lot of accounting time. And the more restricted gifts that you have, the higher your audit fees are going to be, the more complicated your books are going to be, the more tracking. So it's going to be accounting intensive. Uh I that's why I really like the predetermined menu, because because mainly because you can take those items off that menu and create a win-win situation where the money is released almost instantly because there's a need. Um another one, like I said before, I was an auditor during the 2007-2008 market crash and financial crisis, and having too many endowments or restricted funds may make your books look like you have cash, but um there's not a lot of flexibility. So instead, maybe consider doing some board-designated funds or quasi-endowments where you know there's not as many restrictions or write the endowment agreements to include stipulations that if the organization's in dire straits that they're allowed to use it for specific purposes. Um, some opportunities to kind of consider. I love doing strategic fundraising sessions. Uh, staff get really, really excited to do these too, because they probably have all these ideas in their brain because they're in the weeds. And I also like to include the board or if there's like a task force or a subcommittee. Um, but I like to do a nice, well-rounded staff volunteer, stakeholder, donor fundraising strategic session where we just kind of work backwards into the need. So where we may have started the budget and said, okay, we have a $200,000 gap. Where can we go? What can we do to close that gap? Or do we need to cut something out of the expenses? And a lot of the time you can kind of determine the need and then create the plan. And that's kind of one of my favorite ways to work as an accountant is that I don't like saying no to folks when the budgets don't balance. I like to really work and be creative. Um, an example of this is uh an immigration organization literally lost their funding 2 30 on a Thursday night. And the staff came together and like, we want to save the organization. It doesn't matter what we need to do, we'll make it happen. And that was probably one of the most inspirational meetings I've had. Um, where the staff are like, we're gonna do this. And they did, they'd save the organization, and they raised enough money to get them to a spot where they could actually ask for larger funders to step up because the staff are like, hey, we want to save this organization. We raised this amount of money. Will you be willing to match it? So some really amazing things can happen. Um, you can also ask the local funders and local foundations to come in and provide some guidance. Um, they can look at your 990, they can look at your financials, they can look at your fundraising platform and marketing and give you feedback. Uh, in regards to kind of new revenue streams, this is a hot topic that is coming up more and more as funding kind of changes and cost of living goes up and those small donors are starting to disappear a little bit. Is what types of revenue streams and programmatic revenue models can you use to kind of bridge those gaps either temporarily or for the future and growth? So, examples could be creating new membership programs, creating sponsorship programs, finding community partners, or even sharing services with another not-for-profit. And there's a lot of awesome models out there that you have to be aware of that some things can create taxability for nonprofit organizations. There's something called UBIT, also known as unrelated business income tax. And there's kind of a three-part prong to it that as you're kind of reviewing new revenue streams, you have to ask yourself, is it a trader business? Is it regularly carried on? And is it not substantially related to the purpose or mission of the organization? Now there's certain exclusions in the IRS code. It's kind of like um the opposite of innocent proven guilty. It's kind of taxable until proven not. So a lot of organizations, like a lot of the times, rent can be excluded from taxability depending on the situation. Um, certain sponsorships could be taxable if they uh the sponsors get something of value, like tickets to an event or a quid pro quo of getting dinners or meals that have to be evaluated. But I always like to say, you know, as long as you're not doing a lot of taxable activities where it's larger than your mission and your vision, and there's a whole series of calculations and uh code that you can read on this section for more information. But unrelated business income tax isn't necessarily a bad thing for an organization. It increases your risk chance for audit, you know, if it looks kind of egregious. But you are allowed to do taxable items to a certain extent. That being said, it takes time and effort and additional tax forms to be filed, so it has to be worth it for the organization to do these types of things. So as you're kind of evaluating your opportunities for new revenue streams and coming up with their strategic fundraising plan, is to just loop in your accountant and just make sure that anything new that you're adding for a revenue stream would be excluded from tax, or if you know that it's going to be a taxable activity that you have planned for that and for the additional work and taxes that may be involved. But I also feel that strategic fundraising is something that a lot of organizations don't necessarily focus on as much as like the strategic plan or the budget, but it's really important. And I think it's good to have everyone kind of on the same page, especially like, for example, the house donation that I explained earlier. Um just so that everyone's on the page, same page, everyone understands what the organization's needs are, and that you kind of create an operational model that's a little bit more balanced and structured in comparison to just trying to get donations and grants through the door. So I hope this was helpful. Um feel free to reach out if you have any questions. I'm here to support you all, and good luck with your fundraising plans.