MBAX 6850 Week 5 Nonprofit Revenue Mix Analysis Example

Whose Priorities Lakeshore Must Weigh: A Revenue Mix Analysis of a $4 Million Literacy Budget by Who Decides Each Stream, What Each Funder Expects Back and How Tightly Each Is Restricted

Student Name

Walden University

MBAX 6850: Introduction to the Nonprofit Sector

Instructor Name

Month Day, Year

Whose Priorities Lakeshore Must Weigh: A Revenue Mix Analysis of a $4 Million Literacy Budget by Who Decides Each Stream, What Each Funder Expects Back and How Tightly Each Is Restricted

Why the Mix Matters

Knowing where a nonprofit's money comes from tells a reader whose priorities it has to weigh. This analysis breaks down the illustrative $4 million budget of Lakeshore Literacy Alliance, the invented northeast Ohio literacy organization profiled earlier in the term, into five streams, and asks three questions of each: who decides whether the money comes, what that funder expects in return and how tightly the money is restricted. Froelich (1999) argued that each type of revenue brings characteristic pressures, from the volatility of individual giving to the goal displacement that government contracts can produce, and the analysis applies that idea to one organization.

Five Streams, Round Figures

Table 1

Lakeshore Revenue by Stream, Illustrative

Composite organization; all amounts illustrative.

What Each Funder Expects Back

The table's middle columns make obligations visible. The state contract is the largest stream and the most demanding: Lakeshore must enroll learners who meet eligibility rules, record attendance hours and report test gains on the state's schedule. Because it pays on reimbursement, Lakeshore spends first and is repaid weeks later, so the contract also creates a cash-flow burden. Foundation grants expect project-specific results and reports, often on different timetables from the state. Individual donors expect much less in formal terms, mainly acknowledgment and evidence that their gifts matter. Their trust rests on the form itself, the point Hansmann (1980) made about donors who cannot see the service they pay for. Employer fees bring a market relationship: employers pay for a service and expect it delivered well, or they will not renew.

Restriction, Stream by Stream

Restriction determines what Lakeshore can do with each dollar. About $2.5 million of the $4 million, the state contract and most foundation grants, is restricted to particular services or projects. The employer fees are tied to the classes they buy. That leaves individual gifts and event proceeds, about $1 million together, as the bulk of Lakeshore's unrestricted money. Those dollars pay for things no funder wants to fund directly: the finance office, the executive director's time, the cash reserve that covers the gap while the state's reimbursements are pending and the volunteer program's unreimbursed costs. Individual gifts are therefore worth more to Lakeshore than their 20 percent share suggests.

Whose Priorities Shape the Program

Weighing the streams together shows that the state contract shapes Lakeshore more than its 40 percent share indicates. Its reporting requirements define what counts as success, test gains and attendance hours, and the organization's data systems and staff time are organized around them. That fits the account by Salamon (1987) of government and nonprofits as partners, with government supplying funds and nonprofits delivering services, but it also illustrates the risk he noted: dependence on a single public funder can pull an organization toward that funder's definitions of success. Lakeshore's mission emphasizes goals learners set for themselves, while the contract emphasizes standardized test gains. The two usually align, but not always.

Cash Flow Under Reimbursement

The state contract's payment terms deserve their own note, because they affect Lakeshore more than its share of revenue suggests. The state reimburses allowable costs about 45 days after each month ends, so at any moment Lakeshore has roughly two months of contract spending, about $270,000, paid out but not yet repaid. Unrestricted money covers that gap. In a year when individual giving fell short, Lakeshore would have to draw on a line of credit or delay payments to vendors simply to keep delivering a contract it had already won. Unrestricted gifts thus underwrite the restricted program as well as the organization's overhead.

Concentration and Risk

A single contract providing 40 percent of revenue is a concentration risk. If the state rebid the contract and Lakeshore lost it, the organization would lose nearly half its budget at once. Froelich (1999) found that organizations relying heavily on government funding tend to experience less volatility year to year than those relying on donations, but face larger shocks when a contract ends. The response is not to abandon the contract, which funds most of Lakeshore's English classes, but to grow unrestricted individual giving gradually, so that a lost contract would be survivable. The fundraising plan in the following week sets that goal.

References

Froelich, K. A. (1999). Diversification of revenue strategies: Evolving resource dependence in nonprofit organizations. Nonprofit and Voluntary Sector Quarterly, 28(3), 246-268. https://doi.org/10.1177/0899764099283002

Hansmann, H. B. (1980). The role of nonprofit enterprise. Yale Law Journal, 89(5), 835-901. https://doi.org/10.2307/796089

Salamon, L. M. (1987). Of market failure, voluntary failure, and third-party government: Toward a theory of government-nonprofit relations in the modern welfare state. Journal of Voluntary Action Research, 16(1-2), 29-49. https://doi.org/10.1177/089976408701600104