Association for Public Policy Analysis & Management

A large body of research has shown that diversifying revenue streams contributes to financial stability (Carroll & Stater, 2009; Greenlee & Trussel, 2000; Hager, 2001; Keating et al., 2005; Tuckman & Chang, 1991). Recent empirical studies highlighted the need to pay attention to the composition of revenue streams (Chikota & Neely, 2014; Kim, 2016; Mayer et al. 2014). Our study extends earlier literature on nonprofit revenue diversification and examines the way nonprofits diversify their revenue streams based on Young’s (2007) benefits theory.

Previous literature (Chang & Tuckman, 1994; Chikota & Neely, 2014) explored why some nonprofits diversify their revenue streams more than otherwise similar organizations. However, little attention has been paid to the relationship between the nature of services and revenue structure (Wilsker & Young, 2010). The benefits theory asserts that intrinsic characteristics of nonprofit goods and services should be reflected in their revenue portfolios. Only few studies tested this normative idea.

As such, our study examines whether nonprofits whose income portfolios reflect the nature of benefits conferred on are more likely to be financially sustainable than otherwise similar nonprofits. The analysis draws from a 5-year panel data from the DataArts that covers 501c3 arts and cultural nonprofits, which completed the DataArts form annually between 2011 and 2015. We have categorized arts nonprofits into five groups based on the primary type of benefits they produce—private, public, group, trade, and mixed benefits groups, following Fischer et al. (2011). For instance, dance, ballet, and theater are grouped as primarily private-benefits focused organizations while radio or historical preservation organizations are grouped as public-benefits entities.

To assess the level of financial sustainability (inversely, vulnerability), we used four dimensions — revenue diversification, administrative expense ratio, operating margin, and equity balance (Greenlee & Trussel, 2000; Trussel, 2002; Tuckman & Chang, 1991). For each dimension, nonprofits in the top quintile are labeled being safe while those in the bottom quintile are labeled at-risk. We coded being safe as 1, at-risk as -1, and the rest as 0. Then, we combined the values that represent the each of the four dimensions to create the financial sustainability index (ranges from -4 to +4). Finally, we identified the organizations whose primary revenue source corresponds with the benefits conferred on.

Preliminary results show that organizations conferring mainly public benefits such as public radio stations are likely to show a higher value in the financial sustainability index when their major revenues come from public support. For organizations producing mainly group benefits such as membership-based organizations, drawing primarily from contributions appears to be the right approach to maintain financial sustainability. However, we did not find empirical support that drawing revenues primarily from private-benefits oriented sources such as admission fees is important for the financial sustainability of arts nonprofits providing largely private-benefits services. We will discuss the implications of our empirical results for the normative argument that nonprofits should cultivate revenue streams that reflect the kinds of goods and services they produce.