Técnicas

Froelich (1999) examined the effects of three major revenue strategies in non-profit organisations. The author distinguished the following strategies: private contributions, government funding and commercial activity. The attraction of charitable donations from enterprises and/or individuals for socially valued programs is seen as a classical example of traditional fundraising (Froelich, 1999, p. 247). As a percentage of total revenue, this source of funding is declining, although total private contributes increases annually due to reduced income tax incentives for this kind of donations (Froelich, 1999, p. 248). According to Froelich (1999, p. 250), private contributions are highly unpredictable and instable. That is why revenue volatility is high. Moreover, a potential side effect of private contributions is goal displacement; in order to satisfy contributors’ wishes, goals and activities are modified accordingly. Problems of revenue volatility and goal displacement also occur in the case of corporate/enterprise donations (Froelich, 1999, p. 253). Moreover, those contributions lead to process and structure change in non-profit organisations. Corporate donations became less ad hoc and more formalised by means of contribution committees. In response, non-profit organisations also formalised their operations in order to meet the criteria for gift allocation. In the end, this resulted in a professionalised form of administration in both types of organisations (Froelich, 1999, p. 253). The pursuance of government grants is another revenue strategy; this funding source varies over time due to changes in political leadership and public policy initiatives (Froelich, 1999, p. 248). Many non-profit organisations though rely on government funds for their existence; alternative sources of income are lacking (Froelich, 1999, p. 255). Government funding is a stable source of income. As a consequence, revenue volatility is low. Goal displacement as a consequence of government funding is less likely than it is in the case of private contributions. However, there is also evidence that non-profit organisations are founded in response to the availability of government funding (Froelich, 1999, p. 255-256). Subsequently, goal displacement effects are moderately strong. The process and structure effects of government funding are striking; internal processes and structures of non-profit organisations change significantly. According to Froelich (1999, p. 256), there is ‘overwhelming evidence [that] points to government-driven professionalization, bureaucratisation, and loss of administrative autonomy’. This means that non- profit organisations increasingly mirror the structure and behaviour of government; as a consequence, it risks losing its unique character (Froelich, 1999, p. 257). Selling products to customers or charging fees for program services are examples of commercial activities; many scholars consider commercial activity to be controversial (Froelich, 1999, p. 247). Selling products or charging fees might can, but not necessarily, be related to the mission of a non-profit organisation.

or government entities’. The absence of support from either the government or the marketplace drives non-profit organisations to take action (Froelich, 1999, p. 258). This means that non-profit organisations do have a lot in common with social entrepreneurship. This is enhanced by Froelich (1999, p. 258) who summarizes the criticism of many scholars as follows: ‘the fear is that non-profits will become so like business firms that the social missions will take a backseat to revenue and profitability goals’. Revenue volatility is considered to be moderate, albeit reinforced by the potential for failed commercial enterprises. According to Froelich (1999, p. 259), there is no empirical evidence that there are goal displacement effects regarding this revenue strategy. On contrary, this kind of funding supports new or existing programs and more clients. Thus, goal displacement effects are considered to be weak. Effects of commercial activity on processes are minor. There is some evidence though that the use of rational accountability practices and a cost-benefit mentality, are changes in organisational processes caused by commercial activity (Froelich, 1999, p. 259). Regarding structural effects, non-profit organisations are increasingly found to use forms that are commonly associated with commercial firms (Froelich, 1999, p. 259). In the following table, the revenue strategy profiles are summarized.

Table 7: revenue strategy profiles based on four dimensions (Froelich, 1999, p. 265)

Froelich (1999, p. 263-265) concludes that each revenue strategy has its own advantages and disadvantages. New concerns and greater complexity are logical consequences of revenue diversification. The addition of commercial activity to other forms of income, like private contributions or government funding, ensures greater income stability and more control over income deployment; goal displacement effects are weak in the case of commercial activity. The potential impact of commercial activities on organisational and sector legitimacy is considered to be a primary concern.

Carroll & Stater (2009) examined whether revenue diversification leads to greater financial stability in non-profit organisations. In fact, it tests empirically revenue volatility as described by Froelich (1999); up to then, empirical research regarding this topic was limited (Carroll & Stater, 2009, p. 948). The authors examined the impact of revenue diversification on revenue volatility within non-profit organisations by means of fixed effects regression model. Moreover, they used financial data obtained from the National Center for Charitable Statistics. According to Carroll & Stater (2009, p. 948), the concept of revenue diversification is derived from Modern Portfolio Theory; the core assumption in this theory is that there is an optimal investment portfolio that maximizes returns on

investment and minimizes variance. In practice, an investor has often to take risk in order to maximize returns and/or to give up returns in order to minimize variance. According to Carroll & Stater (2009, p. 949) it is plausible that the adequacy of revenue sources as well as the instability of those revenue sources are taken into account when a non-profit organisations design a revenue portfolio. Moreover, it is plausible to expect that revenue volatility decreases as a consequence of revenue diversification; the financial condition of a non-profit organisation should become more stable over time (Carroll & Stater, 2009, p. 949). Moreover, Carroll & Stater (2009, p. 951) also examined the factors affecting revenue volatility in order to make recommendations about the potential of revenue diversification as a financial management strategy. Carroll & Stater (2009, p. 953-955) formulated the following hypotheses: ‘1) greater revenue diversification will decrease revenue volatility; 2) greater financial flexibility will decrease revenue volatility; 3) greater organizational efficiency will decrease revenue volatility; 4) greater growth potential will decrease revenue volatility; and 5) donative organizations will have greater revenue volatility’. The findings of Carroll & Stater (2009, p. 962) suggest that non-profit organisations with more diversified revenue portfolios (in terms of earned incomes, contributions, donations) have lower levels of revenue volatility over time; this means that diversification can be considered as a viable strategy for organisational stability. Carroll & Stater (2009, p. 962) note that this positive relationship between revenue diversification and revenue volatility does not capture possible trade-offs between funding sources, such as earned income crowding out donations. Carroll & Stater (2009, p. 963) found that non-profit organisations with greater growth potential in terms of retained earnings and fund balances noticed less revenue volatility over time. Donative organisations, on contrary, experience greater volatility over time; this means that revenue diversification can be helpful in order to make this kind of organisations more financially stable (Carroll & Stater, 2009, p. 963). Moreover, organisations efficiency and financial flexibility do not decrease the revenue volatility of non-profit organisations over time (Carroll & Stater, 2009, p. 963). Finally, Carroll & Stater (2009, p. 693) found that exogenous factors such as state context and urban location affect revenue volatility over time; this means that the external environment should be taken into account when assessing the financial health of non-profit organisations. An important implication of this study is that the dreaded loss of legitimacy, as a consequence of earned income, is not reflected into less stability for non-profit organisations over time (Carroll & Stater, 2009, p. 964).