To my surprise, I often discover that nonprofit leaders, especially board members, do not have a clear and crisp understanding of how their organizations are funded. They usually say something to the effect that “we have an $850,000 budget,” but when asked “where does it come from?,” there is a pause.
The answer really comes down to having and understanding your funding model. Most nonprofits rely on two, or maybe three sources: contributed income, earned income, and possibly, investment income. Some organizations lean heavily on earned income (they have programs that produce earnings through admissions, fees, contracts, or something like a thrift store), while others go high on contributions (individuals, business sponsorships, foundations, fundraisers, etc.). Money from memberships usually ends up in either the earned or contributed categories. If membership fees are for services, then it fits as earned income. If membership is another way to donate, it is contributed income. My YMCA membership looks to me like earned income, while my Truman Library membership is a contribution.
Sometimes investment income is another source of earnings, such as interest off of savings and securities, or an annual distribution from an endowment fund. The vast majority of nonprofits are not blessed with factoring in these sources in their funding plan.
Here is an exercise. Summarize your nonprofit’s funding plan based on last year’s income and expense report. Use a pie chart graph, separating all of your major categories. Place earned incomes on one side, contributed on the other. Use one color for all earned, and one color for all contributed sources. Add a slice and color for investment income if applicable. Note your total income and the percentages of each of your two or three major sources. Share this information with both your board and staff. I guarantee it, for most, it will be enlightening.
For more information be sure to check out my book Board Essentials: 12 Best Practices of Nonprofit Boards