From Grant Dependency to Diversified Revenue: A Practical Framework for Nonprofit Leaders
Grants are not a funding strategy. They're a funding source.
There's a difference here that matters to you if you are a nonprofit leader worried about a grant hole in your budget. With so much disruption to federal and foundation grants this year, many nonprofits are losing a funding source they thought was stable. And if your organization is grant-dependent, it's a very stressful time.
A funding strategy is an overall plan for funding your organization. This should include diversified funding sources such as individual donations, sponsorships, grants, earned income, and corporate partnerships. A funding source such as a grant can be part of this strategy. But if a single funding source is your entire strategy, your organization is at risk.
If you want to learn more, check out our GPA Microlearning session, "When Grants Aren't Enough: How Grant Pros Can Help Build Sustainable Revenue Beyond Grants." And if you're in the middle of an active funding crisis right now rather than planning your next chapter, start with What Your Nonprofit Should Do Right Now If Federal Grants Are Your Primary Revenue Source first — this piece is about building the model that keeps you from ending up back there.
The grant dependency trap
See if this sounds familiar. When your organization thinks "fundraising," you think "grants." Your Board doesn't know a lot about fundraising, and their favorite phrase is "We need a grant for that." You are an expert in your mission and your organization's programming, but your background is not in fundraising, and, honestly, the thought of asking someone for money makes you nervous.
Grants seem a little less intimidating than other types of fundraising, so you go for it. Maybe you're good at writing, or maybe someone else on your team is. Grants don't require your Board's involvement. That's a bonus, because conversations with your Board about money can be hard. Plus, if you get a large grant, you won't have to fundraise for a while, and you can go back to working on programs, which you are much better at anyway.
You do a good job with your grant proposal, and you are funded! This is an accomplishment for which you should truly be proud. Your community will get the services they need. You celebrate with your Board and cash the check. This is a system that works — so you apply for more grants when you need more money. And time goes on.
You and your Board become accustomed to building your organization's budget around grants. Toward the end of each fiscal year, you look at which grants you have secured or expect to secure, and that's how you plan your expenses. For a few years, it works.
Until it doesn’t. Something happens, and now, your grant is at risk. Your grant funder changes their giving priorities. Government officials cancel federal grant programs. You're facing increased grant competition. Your funder starts saying they don't want you to "become dependent" on their funding. You look at your organization's budget, which is mostly grants. What do you do now?
What diversification actually means
Stable nonprofit funding relies on diversification. We've all heard that catchword before. But what does it actually mean?
Diversification means your organization is funded by multiple sources, so you are not reliant on any one. It's the classic don't-put-all-your-eggs-in-one-basket strategy. Common funding sources for nonprofits are individual donors, earned revenue, corporate partnerships, special events, and grants.
Individual donors
Individual donors are the lifeblood of stable nonprofit organizations. These are people in your community donating online or writing a check. Individual donors are responsible for more than 65% of charitable giving in the US every year. This means that more than 65% of the money available to your nonprofit is held by individuals. It makes sense that this is where you should spend your time.
When we think of individual donors, we often assume we have to involve people who are very wealthy or prominent in the community. That feels hard because we don't have those relationships. But in reality, ordinary people give generously every day. You simply need people who love the mission as much as you do.
Earned revenue
This is money that your organization earns by selling a product or service to the community. Earned revenue is an underused resource for many nonprofits. Smaller nonprofits, in particular, often feel that they cannot pursue earned revenue because "we are a nonprofit" and therefore must give everything away for free. But earned revenue can be a powerful, stable source of income. And it's unrestricted money: the funding dream!
There are many ways to earn revenue, depending on your mission. Arts organizations have ticket sales. Education organizations have tuition. Healthcare organizations have patient service revenue. Nonprofits serving a high-poverty population (such as homeless shelters or food banks) must keep their services free, but can earn revenue by operating a thrift store or renting their unused warehouse space to other organizations. Membership dues, merchandise sales, and contracted services are other common forms of earned revenue.
Many earned revenue sources offer a benefit that philanthropic funding does not: they create a relationship between your expenses and your income. For instance, let's say you charge a fee for your youth summer program. As long as your per-person fee is greater than your per-person expenses, enrolling more people will increase your income, which will offset your expenses and ensure they don't outstrip your resources. In many nonprofits — social service agencies in particular — this link doesn't exist. Demand for food assistance can spike with no corresponding effect on your income. That's what drives many nonprofits into the red and keeps us up at night.
Corporate partnerships
Corporate partnerships are usually tied to sponsorships. A corporation or small business invests money in your nonprofit, and in return you give them public recognition — at your events and on your website — as part of their marketing strategy.
If your nonprofit hosts events of any kind, you should pursue sponsorships. This is a missed opportunity for many nonprofits that host "awareness events" without a fundraising component. Event sponsors usually cause very little additional work. Your sponsorships should raise money for your organization — not help your event "break even."
More and more businesses are interested in sponsorships that aren't tied to events. You can offer a sponsorship package that includes recognition throughout the year, perhaps also with employee volunteer opportunities or matching gifts.
A word of caution: because corporate support is marketing-based, corporate sponsors often achieve a level of community recognition that is disproportionate to their role in a nonprofit's overall revenue. Remember that while you hear a lot about corporate support, corporations represent only about 7% of total philanthropic giving in the US each year.
Special events
Many nonprofits default to special events to fill a budget gap. (“Let's do a gala!”) But of all common fundraising sources, events are the least profitable way to raise money. They take immense amounts of staff time and expense and drain those resources away from more efficient fundraising methods, like individual donors. Many nonprofits publicize the amount raised from events without factoring in staffing costs — and once you do, many events end up losing money.
Special events are often favored by Boards and leadership who are nervous about asking people for money. Providing a fun party in exchange for support feels easier than asking for a donation. But it's common for people to attend a fun party who don't care at all about the mission — and those people aren't going to become donors. What if you took the 100 hours of staff time your event costs and used those hours on major gifts from people already devoted to the mission instead?
If your programming is facility-based — a museum, a botanical garden — it may be worth hosting an event in your space to get people in the door. Just make sure it's genuinely mission-centric, not a generic gala or golf tournament unrelated to what you do, so it attracts people who become regular donors. For this type of organization, your "fundraising" events may actually be part of your programming — which makes them more like earned revenue.
Grants
Grants are usually one-time funding restricted to a particular program or purpose. A grant is a partnership: the funder provides money, and the nonprofit provides expertise. Together, they work toward the same community change. Grant funders have missions just like nonprofit organizations, and the key to grant success is aligning those missions.
The ideal role of grants is to help you launch something new and innovative, which you'll then sustain through other funding sources. It's easier to "sell" programs to donors once they exist and have a track record of success. Grants can help with the initial launch or expansion.
Nonprofit leaders often pursue grants because they're large amounts of money that don't require asking someone face-to-face for a donation. But grant funds are restricted and often come with reporting requirements. Of all sources of funding, they're the most difficult and costly to manage.
The framework: how to build it in stages
If you are facing a loss of grant funding and are ready to diversify your funding sources, it can be overwhelming to determine where to begin. I recommend three phases for nonprofit leaders in this position: 1. Stabilization, 2. Infrastructure, and 3. Growth.
1. Stabilization
If you are experiencing sudden funding loss, stabilizing your organization is your first step. Assess your financial situation and work hand in hand with your Board to determine whether you have other funding options that can be leveraged in time to continue your programming. If you have a donor base of individual givers, talk to your largest supporters about the funding gap and determine if they can fill it.
If you don't have an individual donor base already and there aren't other funding options available quickly, you will have to cut your programs. Cut your expenses back to a level that you are confident you can sustain with the funding losses.
This may feel like failure, I know. But if the money isn't there, the money isn't there. Deciding to make an inevitable cut sooner rather than later will help you do this as strategically as possible. View these cuts as a temporary measure to keep the organization financially stable while you decide what to do next. And your next step is building your fundraising muscle.
2. Infrastructure
You would not try to operate your programs without staffing, training, and tools. Your fundraising is no different. At minimum, a good fundraising program must have:
Staff with the time, focus, and self-motivation to do fundraising work. This starts with the Executive Director prioritizing time for fundraising. Eventually, you will also need a dedicated fundraising staff position, but you can start with a contractor and/or an assistant at a lower cost.
A Board that is involved in fundraising. As an Executive Director, you cannot raise money alone, no matter how much of a fundraising rock star you are. Your Board must be involved — bringing potential donors to the organization, helping cultivate donations, and thanking donors. First and most importantly, they should give financially themselves.
Fundraising knowledge. If you and your Board have never embarked on a strategic fundraising program, you will need professional development to equip you for success. Seek the help of a consultant who can assess your situation and recommend next steps.
A donor database — not just an Excel spreadsheet. A donor database helps you analyze your donors, reminds you of donor tasks, and houses information in a place that won't get lost in a staff transition. If you're thinking you cannot afford it, keep in mind you will raise significantly more money with a database than without one.
There is a tendency in many nonprofit organizations to cut fundraising expenses when money is tight. We feel like we should prioritize programs, right? But cutting your ability to raise money when you need to raise more money never goes well. Your programming can never be stable without investment in fundraising.
3. Growth
Once you have the staffing, training, and tools in place, it's time to make a plan. Identify the funding sources you want to develop and create a strategy for boosting these sources. This plan should have enough detail to hold you accountable, but not so much that it feels overwhelming. It should specify who is responsible for what — staff, board, and other volunteers — and the timeframe in which things will happen.
No matter what your organization does, cultivating individual donors should be at the top of your list. You likely have at least some donors — your organization wouldn't have gotten this far without them. Talk to these donors. Explain the situation. Ask them for advice. Listen to their experience being your donor. You will learn a lot from these conversations.
If donors are interested in helping bridge the gap, ask them for a gift. This doesn't have to be complicated. It helps if you create a mini "campaign" with a dollar goal you need to raise for the year and a snazzy one-pager explaining what you will do with the funds. People like to help you reach a goal. Share the goal, share the one-pager, and simply ask for support.
Here are some of my favorite phrases for the ask:
Would you be interested in supporting this campaign?
Would you consider making a gift to help us ___________?
Would you join us in donating to this program?
Would you support [people the program serves] by donating?
People give for all kinds of different reasons, but most give because: 1) they love the work you do, and 2) you asked them.
The hardest part nobody talks about
It can be hard talking about money. I know many nonprofit leaders who would walk through fire for their clients and communities — who regularly sacrifice sleep, nutrition, their social life, even their personal relationships in service of their organization's mission (I don't recommend this). But they cannot bring themselves to ask someone else to do something small for the same cause.
If this is you, you're not alone. You're in great company, actually. Many people get into nonprofit work because they want to feel that their work transcends money and is more important.
But you still have to pay the light bill. Which means you must work your fundraising muscle. If you're nervous, practice on a friend. Role-play a conversation. Make an ask. Make asks of your most supportive board members. If you have regular donors, "ask" them when you know they'll say yes. This builds confidence.
Then, practice having someone say no to you. It's okay. You'll survive it.
Kept both book recommendations — they fit the empathetic, we've-been-there voice and give the reader something concrete to act on. Tightened the sentence around them.
If you're still nervous about how to have fundraising conversations, I recommend two books: Kent Stroman's Asking About Asking, and Amy Eisenstein's Major Gift Fundraising for Small Shops. Both are practical, not theoretical — written for people who feel exactly the way you do right now.
Where to start this week
This week, start by assessing your financial situation.
Map your projected income and expenses over the next 6 months (your bookkeeper will help).
Determine how much money you are lacking, and in what timeframe.
Share this information with your Board Chair. It's time to huddle the team to decide what to do next.
Ready to build the plan?
If you've read this far, you're already thinking seriously about what a diversified funding model could look like for your organization — and that's exactly the conversation I want to have. Let's talk through where you are right now, what's realistic given your size and your team, and what building this out could look like on your timeline.