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Seven Lessons for Nonprofits on Financial Sustainability
How do you define sustainability? Reliable and repeatable revenue that covers the full cost of your enterprise and aligns with your mission – at least that’s how Kristin Giantris from the Nonprofit Finance Fund defined it at the “Financial Models: Achieving Sustainability at Scale” session at the Symposium on Scaling Social Impact Monday.
Panelists Matt Aguiar from Reading Partners, a school tutoring program that’s grown from $2 million in revenue to $16 million since 2006, and David Carleton from Catalyst Kitchens, the business plan winner at last year’s conference, shared lessons from two very different financial models.
At Partners in Scale, we work with clients looking to scale their impact. Even the most sustainable organizations struggle with how to fund the infrastructure they need to scale their model, and how to ensure sustainability for their programs at a much larger scale, often in different geographies.
Here are seven lessons that will apply to most organizations:
1) Fee-for-service can connect your value chain – Both panelists considered fee-for-service an important part of their revenue mix that kept them both connected to their customers (in this case the branches or member organizations) and more sustainable. While some fee-for-service models can be distracting to your core business model, it’s worth considering if it aligns your value chain and your mission.
2) Build a reserve – Board designated reserve funds to protect from downturns or other risks are crucial. Make sure you think through the policies and uses of those funds before you need them!
3) Plan for contingencies – Reading Partners goes through a contingency planning exercise annually when they set budgets – planning for both 10% and 20% reductions in revenue that would still allow them to meet their goals in terms of students served.
4) Skin in the game – Catalyst Kitchens described a virtuous circle where two tiers of members pay dues to support the backbone organization, which in turn raises money to grow the network through sub-grants and replication. Reading Partners charges wholly-owned branches a significant fee based on local revenue, providing a variety of services from fundraising to R&D in return.
5) Follow demand to find value in your service delivery model – Reading Partners started charging fees for service to school districts after they were approached by a new principal to help increase her school’s reading scores. After being told there was no funding for new schools, the principal offered to contribute to the cost. Thus began a fee-for-service model, which now accounts for 14% of Reading Partners’ revenue.
6) Don’t confuse “Build” vs. “Buy” money – Different kinds of capital have different purposes, require different strategies to raise, and can be dangerous if you confuse one with the other. “Build” money is growth capital to scale up your organization and should be spent to build the infrastructure or capacity necessary to scale. “Buy” money or operating capital is funding to support your ongoing operations or “buy” your services. Buy money must cover both the cost of those services and whatever associated overhead goes with them to sustain your organization.
7) Think through your “exit” strategy for growth (build) funders – Philanthropists are used to paying for proof of concept, but they need to see a plausible exit strategy before they invest. In other words, how will the organization be sustainable after they achieve the scale in their “building” phase?
What’s your organization’s model for sustainability? Although your funding model will vary based on your field, your size, and your organization’s unique strengths, having a clear business model is crucial for all organizations.