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Most nonprofits have unique ways of accounting for revenue sources, and many operate with special conditions related to raising funds for their mission. Very complex and complicated. For profit board members and those that are employed by nonprofits can benefit from simplifying and understanding what makes your organization tick and asking where should we go from here? 

Over 20 years ago, I had the privilege of co-founding a group of nonprofits called the Environmental Roundtable. It is a collection of CFOs and COOs for some of the largest and most significant environmental and animal welfare nonprofits in the US that meet periodically to review best practices and discuss hot topics in our industry. Each year we collect financial and human resource data to compare where organizations are and discuss what is next in the industry. 

One key benchmark asked about a nonprofit is, “What is your size?” which is typically the organization's revenue. In our first year of the study, we asked the group to report their revenue by type, and as you might expect, we received a multitude of sources of revenue. The data was complex to analyze, as each nonprofit had various names for its revenue sources. 

Out of this confusion, a light bulb came on during a meeting. We decided to think more broadly as a group, as this data should give us more helpful information. After much debate and moderation by Steve Howell, current COO of Best Friends, we landed on a principle that we have used for twenty years: 

So what? You may have heard, "All money is green," so let's raise as much as possible to support our mission, but is some money greener than others? 

My answer is a resounding, "Yes."  

When facilitating strategic plans or fundraising campaigns for nonprofits, I often ask their leadership, "What is the best use of your resources?" Usually, I hear that the best use is for the mission. While this is an excellent use of resources, it fails to consider the balance of other options for using funds to invest in the needs of the nonprofit's fundraising, people, or sustainability. Each nonprofit is different, and it is a wise exercise for leadership to understand where resources are needed for the longer term of ten years or more. 

Based on this exercise, it is easy to conclude that the greenest money is the money available for a nonprofit’s greatest long-term needs. Nonprofits need to review their mix of resources of today and think about how they want their combination or mix of resources to look tomorrow? We should plan for the future today. 

 So, what are these four sources?  

1. Philanthropy – These are “gifts” made to a nonprofit. Their classifications are unrestricted, restricted, or both. Philanthropy can come to an organization in roughly five ways:
   1. Event-based philanthropy – Volunteer-driven events that raise money at, for example, an auction, a dinner, a 5K, or a golf tournament, among other fundraisers. The YMCA is the first nonprofit on historical record to hold a fundraising event; they were widely used in the late 1800s and have evolved from there. Ducks Unlimited and St. Jude are current pioneers and leaders of the event-based fundraising approach.
   2. Royalties – Generally speaking, these are payments made to a nonprofit for the use of its logo or use of proprietary technology developed by the nonprofit. Corporations want to align themselves with and partner with a nonprofit and offer philanthropy to utilize their brand imagery.
   3. Direct response – Probably the most common form of philanthropy in nonprofits, it can be defined as individual regular giving for a membership or annual giving to the cause. It takes shape in digital giving or response to a mailing request.
   4. Major Gifts – This is the process of cultivating donors to give significant dollars to nonprofits, usually for a particular purpose. Many suggest this as the most important facet of philanthropy.
   5. Planned Gifts – This term, coined by Robert Sharpe Sr. (Sharpe Group) in 1969, is now commonly used in the nonprofit community to represent deferred gifts made by donors with forethought (or a plan), typically carried out by a trust or a will. Planned gifts require organizations to discipline themselves to invest in relationships over many years, gaining donors' trust to treat them like family members.
2. Investment income – As expected, investments generate this income, commonly from an endowment. Universities and Hospitals have been leaders in developing Endowments to generate unrestricted revenue or income restricted to mission-only expenditures.
3. In-Kind – These are gifts of resources or services used for the programs inside nonprofits. It can come in many forms, such as legal resources, event or office space, or supplies donated for a mission or cause. Goodwill and World Vision receive large in-kind gifts annually to support their missions.
4. Non-philanthropy – Income generated by grants or contracts generally contingent upon specific program spending requirements. Most of the time, these are restricted public or private grants (or contracts) that require a nonprofit to spend the money and report under a specific restriction.

So what? You may have heard, "All money is green," so let's raise as much as possible to support our mission, but is some money greener than others? 

My answer is a resounding, "Yes."  

When facilitating strategic plans or fundraising campaigns for nonprofits, I often ask their leadership, "What is the best use of your resources?" Usually, I hear that the best use is for the mission. While this is an excellent use of resources, it fails to consider the balance of other options for using funds to invest in the needs of the nonprofit's fundraising, people, or sustainability. Each nonprofit is different, and it is a wise exercise for leadership to understand where resources are needed for the longer term of ten years or more. 

Let me explain that a bit more: 

1. Investment income generally comes from investments saved over multiple years. I typically see two types of nonprofits: 1) those with endowments and 2) those without endowments. Those with endowments have built their reserves over a long period of a well-executed strategy of saving and growing endowments, most likely from planned gifts. If your organization does not have a planned giving program, you should start one. Soon. If you have one, you should build it up. Endowments can provide income in perpetuity. 

2. In-kind donations are both a revenue and expense for nonprofits. It's an even-sum game. They are an excellent resource for accomplishing the mission but, as a stand-alone, do not provide other resources for use. Nonprofits should consider contemplating how to multiply their philanthropy by asking for more than in-kind gifts, which may be tax deductible for donors. I worked with a highly esteemed nonprofit with a donor that had given an in-kind contribution of over $50 million. While this was great for the mission, the development officers asked for only a $10,000 cash gift to accompany the in-kind donation. My reply was to rhetorically ask why the donor received a $50 million tax deduction while the nonprofit held the bar so low on the size of the cash gift? 

3. Non-philanthropy most often requires spending an equal dollar amount of revenue received (or a net of zero) or a larger amount than what is received (a net negative). Grants are a great way to leverage your mission needs to have a more significant impact, but they do not provide extra resources to be used for other important needs of the organization.  

Philanthropy is the only money that can be saved, does not have to be spent, and can build reserves or endowments.  

You've heard the phrase, "Cash is king"; but in the nonprofit world, "Philanthropy is king," and the right mix and development of those five sources of philanthropy are critical for your organization's success. 

I’ve been fortunate to lead nonprofit assessments for more than twenty years. It is fascinating and rewarding to work with our country's great minds and their missions and to learn from these leaders where they are and where they want to go. You should explore with your leadership where you currently invest resources and look at your revenue sources with a lens toward how these investments may be maximized to generate the best long-term results for your nonprofit and your mission.  

Bob Mims, CPA, is currently a fractional CFO and consultant in the nonprofit space, and authors and teaches for The Knowledge Institute. Most of his writing and courses offer unique and comprehensive approaches to workable strategies, understanding the ROI on employee workforce, Grant Accounting, Budgeting, and big picture approaches considering generational influences, demographics, and the economy. He resides in Memphis, TN. If you have questions or desire further discussion, feel free to reach out at bob@theknowledgeinstitute.com.