The cost of revenue
Every dollar you earn or raise costs you something. Spend wisely.
“…you can’t afford to squander what you’re not prepared to pay.”
—Billy Joel, from “Close to the Borderline”
Nonprofit arts organizations are always on the hunt for revenue. Whether captured through commercial transactions or generous gifts, revenue provides the fuel for art-making with complexity or at scale. The standard assumption is that more revenue streams are always better, and diversification should be the dominant logic.
And yet, every stream of revenue comes at a cost. Ticket revenue requires energy, effort, staff, and attention to start it and keep it flowing. Contributed income requires staffing, strategy, and support systems. Auxiliary revenues from merchandise, coffee shops, weddings, and corporate events require expertise, infrastructure, and operational investments.
That doesn’t mean you should avoid new revenue streams. It just means you should approach them with full awareness of the costs to your people, stuff, money, and especially your mission. Those costs come in many forms:
Financial cost: New streams of revenue generally require new processes, policies, systems, and people, all of which can add financial cost — both fixed and variable.
Time and attention: Chasing a revenue stream can distract you from chasing something else. Sometimes that ‘something else’ is the mission and purposes of your organization. Further, if you can’t hire new people to take on the new work, your current team will need to divide their attention.
Overhead and undertow: Every project brings some form of administrative overhead – meetings, coordination costs, communication threads, authorization routines. So, the more projects (aka, revenue streams), the larger percentage of your team’s effort is consumed by administration.
Promises and purposes: Sometimes new revenue comes with strings attached — with regulatory or contractual requirements on how, when, and where you can gather or spend it.1 If those requirements align with your work, your timeline, and your cash flow, hurray for you! If not, you’ve added cost and complexity to your life.
Relationship costs: Financial exchange often defines and refines the relationship between individuals — sometimes harmlessly and in complete alignment, sometimes not. It’s essential to understand how new revenue streams may alter existing relationships that are crucial for healthy operations.
The key, of course, is finding and growing revenue streams that exceed their total cost, and assembling a portfolio that fits your capacity. To get there, you need to temper any breathless calls for new revenue with disciplined assessment of what they will cost you.
From the ArtsManaged Field Guide
Function of the Week: Accounting
Accounting involves recording, summarizing, analyzing, and reporting financial states and actions.
Framework of the Week: Levels of Mastery
The Dreyfus brothers' five-stage model of adult skill acquisition describes milestones on the journey from novice to expert. These Levels of Mastery can provide a useful lens on learning new skills and finding new revenue streams.
Photo by Amanda Jones on Unsplash
A dramatic case-in-point is the Philadelphia Orchestra, which filed for bankruptcy in 2011 even though the organization had no debt and an endowment of $140 million (but still claimed a $14.5 million structural deficit). Almost all of those assets were “untouchable” due to donor restrictions. More on the nonprofit endowment/bankruptcy challenge here.