Decision-making in nonprofit financial management is not only about money. It has to include many different aspects in order to meet the expectations of constituents and to be mission aligned. The following five criteria should be respected.

Governance/ethics

The reliance of nonprofits on private or public donors has an impact on their governance system. As Ostrander and Schervish (1990) show, the relationship tends to become donor dominant, which might entail mission drift. Additionally, the nonprofit board of directors itself is subject to influences of financial management. It must secure oversight and mission orientation. Brown (2005) finds that strategic contributions from the board are more sound in organizations with higher financial performance. Finally, ethical considerations cannot be left aside. Currently, nonprofits find themselves under constant scrutiny. Concerning financial sources, ethical norms apply to disclosure, conflict of interest, and the coherence of a revenue source with the organization’s mission.

Competence

The general business experience and knowledge of executives in nonprofit fields are significantly related to financial performance. Furthermore, the effective use of every revenue source depends on a different set of competencies. Maintaining a revenue source requires internal expertise. Fundraising has become a profession of its own, and for state funding, nonprofits require considerable knowledge on submission requirements and processes. Bowman (2011) highlights the fact that accumulated equity raises the financial capacity of nonprofits, and Calabrese (2012) seconds that nonprofits reduce their financial vulnerability through unrestricted net assets.

Efficiency

Each revenue source has different costs of control and transaction costs (Mayer et al., 2014). The more revenue sources are included in the portfolio, the more different cost structures must be managed. Hence, a highly diversified revenue portfolio might signal stability but simultaneously reduce income due to a loss in efficiency. Another vital aspect of efficiency is to cover core costs. As both public and rating organizations focus on administrative costs as a measure of nonprofit success, raising unrestricted revenues to cover core costs offers leeway in strategic decision-making.

Volatility

Nonprofits are highly reliant on revenue stability to manage their liability. The exposure to volatility varies between the revenue sources. While earned income might change quickly following market developments, state funding is rather stable. However, a change in legislation might cause a shock, and lead to state income dissolving at once. As Mayer et al. (2014) show, reducing volatility does not simply mean balancing investments, earned income, and donations. Instead, nonprofit leaders have to find the right mixture of revenue sources for their organization in relation to their mission.

Interdependencies

There have always been discussions about the interdependencies between different revenue sources. For example, does government support reduce private donations? Some studies indicate the former, others show the latter. But it is necessary that nonprofits pay attention to this issue before they invest in a new financial source.

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References

Bowman, W. (2011). Finance Fundamentals for Nonprofits: Building Capacity and Sustainability. Hoboken, New Jersey: Wiley.

Brown, W. A. (2005). Exploring the Association between Board and Organizational Performance in Nonprofit Organizations. In Nonprofit Management and Leadership 15(3), 317-39.

Calabrese, T. D. (2012). The Accumulation of Nonprofit Profits: A Dynamic Analysis. In Nonprofit and Voluntary Sector Quarterly 41(2), 300-24.

Mayer, W. J., H. Wang, J. Egginton, and H. S. Flint (2014). The Impact of Revenue Diversification on Expected Revenue and Volatility for Nonprofit Organizations. In Nonprofit and Voluntary Sector Quarterly 43(2), 374-92.

Ostrander, S. A., and P. G. Schervish (1990). Giving and Getting: Philanthropy as a Social Relation. In Critical Issues in American Philanthropy: Strengthening Theory and Practice, edited by J. Van Til. San Francisco: Jossey-Bass.

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