The Example of the Museum and Library

Consider this example: on the upper west side of Manhattan, across Central Park from the Metropolitan Museum of Art Met, the Historical Society in New York stands tall, having been established in 1804 as a museum and library 62 years before the Met and 91 years before the New York Public Library (NYPL), which is also a nonprofit institution like the Met and the Historical Society. These younger institutions are now thirty times larger than the Historical Society.

Sustainability is a necessary condition for long-term success, but it is not sufficient to improve an organization's impact. In our example, the Historical Society is over 200 years old and clearly sustainable; however, it has long surrendered its prominent role among New York museums and libraries to its younger competitors. This article addresses how the institution manages its revenue composition to go beyond sustainability and maximize its growth potential.

Diversification or Focus?

Not all funds flowing into nonprofit organizations are equal. Each revenue source has specific characteristics, and there is no shortage of revenue management theories. However, the theory known as resource dependence theory is known for asserting that "the activities of nonprofit organizations are influenced by external funders."

Often, the nonprofit organization and its funders come to an implicit agreement on a set of goals, and thus negotiate a stable source of revenues to achieve these goals. In this section, we focus on two contradictory theories on how to achieve this stability: the portfolio theory and the normative theory.

From portfolio theory comes the idea that revenue diversification can reduce financial exposure to recession and other external economic shocks. This may seem counterintuitive, but it could be possible to predict extremely volatile revenue sources from different lines of business more than to predict from another source alone. However, each line of business also requires a system to support it, making organization management and growth more costly.

The normative theory suggests that organizations should focus on sources uniquely related to the benefits they can provide to a specific population. In other words, it advocates for focus. The downside is the increased vulnerability to disruption in a specific source of revenue.

What Does the Revenue Mix Look Like in Nonprofit Organizations?

Every reader of this article knows that the income mix in nonprofit organizations can be highly diverse, but patterns often look similar within the field, and many fields show a preference for one type of income over another.

For example, nearly 70% of organizations use a funding model heavily reliant on philanthropy, and reliance on philanthropy is greatest in the arts, animal-related services, youth services, advocacy, and charitable work. The portion of organizations in each of these categories exceeds 90%, with donations representing between 45 and 55% of their total revenues.

On the other hand, organizations in the healthcare sector particularly rely on earned income (90% of service providers have some earned income, which averages 74% of their total revenue).

The arts and housing sectors are close in terms of earned income (89 and 88%, respectively), where earned income represents 40% of the total revenue of medium-sized arts organizations and 61% of the total revenue of medium-sized housing organizations. Nonprofits less reliant on earned income fall into the category of charity (11%), while the advocacy sector is not far from this category (16%).

Many large nonprofits that have experimented with multiple funding sources in the early stages of development have grown large by adopting one specific type of source. Among the 200,000 nonprofit cases that have achieved recognition for tax-exempt status since 1970, only 144 currently have at least 50 million dollars in annual revenue. Most of these institutions gather the majority of their funds from one type of funding source, and professional organizations have been created specifically to meet their core funding needs.

Thus, the key to growth may lie in finding the right revenue mix, which may largely consist of one perfectly suitable source, and income sources should align with the nature of the benefits provided to those supplying these resources or that interest those resources.

Returning to the Example

The New-York Historical Society is both a museum and a library, and although both departments are dedicated to preserving artifacts, the revenue-generating potential of each department is completely different. Most museums are private, while most libraries are owned and operated by the public sector, indicating the difficulty of supporting the library on earned income or private philanthropy.

Museums can generate revenue from admission fees and gift shop income, while libraries are likely to wither if they try to charge admission fees and rarely have gift shops (libraries). Both institutions may have members who pay dues, but these members, referred to as members, do not have the privilege of electing the board of directors, so their role becomes closer to that of donors.

The data reflects these differences: in reality, total net budget expenses are nearly equal, but the program service revenue at the museum is eight times larger, membership income is ten times larger, and net income from merchandise sales is forty-five times larger. On the other hand, government support for the Historical SocietyNYPL exceeds six times the support provided to the Metropolitan Museum of ArtMet.

At the same time, the society relies almost entirely on donations, while its competitors derive nearly a third of their combined revenues from government support and another third from endowment income. Their philanthropic support has also come under severe pressure, as it funds activities that are funded by competing institutions with different income sources. Throughout its existence, the society has not received any government support. Even today, the government only covers 8% of reported expenses, indicating that it is clear that the museum supports its library comprehensively.

In reaction to successive budget crises, the society has historically reduced both the museum and library budgets together, and although the internal workings of the society are private, one imagines that this dual policy has been a reason for the diminished support that the museum enjoys for the library, exacerbating the overall budget problem.

Furthermore, the library receives only minimal revenue from program services, thus it primarily claims unrestricted gifts, which is likely to hypothesize the abandonment of the museum without adequate funding, because without government support, the library department in the society has never achieved its growth potential. With the museum department supporting the library department, the museum has deprived itself of the resources it needs to achieve its own growth potential.

Conclusions

The normative theory explains the growth trajectories of organizations. The Met museum and NYPL have designed their revenue structures to serve their respective populations, while the New-York Historical Society has relied heavily on charity.

The normative theory suggests that the society has defined its electoral base very narrowly for its long-term benefit, and this comprehensive examination serves as an example of a peer group analysis that answers the question: "What revenue sources align with the types of goods and services we produce?"

The institution can identify potential revenue growth by comparing the amount of its resources, the revenue obtained from each source, and comparing the percentages with comparable information from other institutions with similar missions and approaches to service delivery.

This information is available to the public through GuideStar and is updated annually.

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