A study of more than fifty organizations in Baltimore with income from $1 million to $50 million shows that close to 90% rely on just one line on the Form 990 for more than half their income. Even more notable: the lion's share of private contributions go to organizations that make private contributions their primary source of income.
A recent discussion on the Arnova-L email list brought up the old topic of whether nonprofit organizations should pursue a strategy of diversifying their sources of income. Woods Bowman, of DePaul University, noted that a few years ago the Bridgespan group (EIN 31-1625487 Form 990), the nonprofit affiliate of the management consulting firm Bain & Co., offered a study of youth services and environmental advocacy groups that attempted to shed some light on this cliché of nonprofit consulting.
Which reminded me of a rainy Saturday project of mine from a few years ago (2001). From the IRS Master File I had identified some 276 charities (other than churches, schools, and hospitals) in the Baltimore area (those with zip codes starting with 212) with incomes between $1 million and $50 million. I randomly selected about a quarter of them, 56 to be exact, and pulled their Form 990s from Guidestar, entering each line of their income to a spreadsheet. Then I figured out for each organization which line accounted for the greatest amount of income and to what extent the organization relied on that lead source of income. (Here is a summary of the results, and here is the data I based the summaries on in comma-delimited text that can be uploaded to any spreadsheet or database program.)
To my surprise, I found that 39% of the organizations relied on their lead source of income for more than 90% of their revenue, and that 50% of them relied on the lead source for between half and nine-tenths. In other words, nearly 90% of the organizations relied substantially on one type of income.
Program service revenue was the most common lead income source (41%), then came private contributions (30%), then government contributions (20%). So these three types of income accounted for 90% of the organizations, as well.
Another notable finding was that 87% of all private contributions reported by all the groups in the study went to organizations that relied on private contributions for more than 50% of their income, even though these were only 24% of the groups overall. It would appear that the only way to raise large amounts of funding from the public is to dedicate the organization to this purpose.
The results of this study of fairly substantial organizations calls into doubt the suggestion of diversification of sources of income for charities. It could be that the answer for an organization is to focus its expertise on one source of funding, be it program service income, private contributions, or government contributions.
Of course, start up charities have to find an alternative to their start-up funding source (typically a foundation) and small charities have to find an alternative to an annual fundraising event if they want to grow. But these truisms shouldn't be generalized into a principle of income diversification. Rather, start-ups and small charities need to point themselves in the direction of just one of the big three funding sources—program service income, public contributions, or government contributions—as the route to sustainability.