Tools

The Revenue Matrix Tool

This section outlines the major steps that we use in helping a nonprofit achieve an adequate and sustainable revenue model. The first step is for the nonprofit’s leaders to identify, evaluate and rank a range of revenue sources that could potentially be included in the organization’s new model. To help in that process, we make use of a tool and process we developed — the Revenue Matrix.

Background

The Revenue Matrix tool was developed from the initial work of Jon Pratt, Executive Director of the Minnesota Council on Nonprofits. He originated a tool by which an organization could evaluate its financial situation on the basis of the reliability and autonomy of its current funding sources.

We expanded the basic concept behind the tool by adding in potential new revenue sources (not just an organization’s current ones) and by adding additional evaluative criteria. The ultimate goal of the revenue matrix tool and process is to devise a revenue model for an organization that is strong, diverse, and sustainable.

Steps in the Process

The following describes the six steps involved in applying the matrix tool to a nonprofit: selecting criteria by which to evaluate each revenue source, defining a “universe” of potential sources, rating each of the potential sources against each of the criteria, doing additional research on the most promising streams, devising the final revenue model, and determining an appropriate phase-in schedule.

We recommend to the nonprofit that a Project Team be selected consisting of board representatives and key staff. The Team would meet periodically to monitor the project and provide key stakeholder input.

We always emphasize that the scoring and ranking process in the Tool does not give all the final answers a nonprofit needs to successfully modify its revenue model. More detailed research including business planning will be needed on most new revenue streams.

Step 1. Select the evaluative criteria. The first step is to select the criteria by which each of the potential revenue sources for a nonprofit will be evaluated. Examples of criteria selected by various of our clients include the following (in alphabetical order).

  • Ability to withdraw: ceasing this revenue source at some future date will not impair the nonprofit’s core operations
  • Fairness: the burden of the revenue source is allocated in a fair and appropriate manner on the payers of the revenues
  • Flexibility: the nonprofit has control over how the revenues can be used
  • Infrastructure: employing this revenue source does not require major additions to the nonprofit’s infrastructure, at least at the outset
  • Mission: the revenue source is aligned with the mission and values of the nonprofit
  • Political acceptability: the revenue source will be acceptable to key stakeholders
  • Potential: there is reasonable expectation of significant revenue growth over time from this source
  • Reliability: the revenue source is generally predictable and consistent
  • Return on investment: the revenue source will produce significant revenues above the cost of generating those revenues
  • Visibility: the revenue source raises visibility and goodwill toward the nonprofit in the community and among its stakeholders

The Project Team is free to use any of these or to select others.

Typically our clients choose 4–7 criteria to use in evaluating the revenue sources, but any number can be used. The matrix tool also permits the Project Team to weight some of the evaluative factors as more important than others. How this weighting is applied is described below.

Step 2. Compile the starting universe of revenue sources. In this second step a starting “universe” of revenue sources is compiled. In this early stage of the Matrix development, it is important to have a broad menu of options. For a nonprofit’s starting universe, we begin with its current major revenue sources, its own ideas for possible new sources, ideas obtained from organizations similar to the nonprofit, and from our prior work with other clients.

The starting universe will vary with each organization, and we typically develop the initial draft. We recommend that organizations begin with a starting universe of at least 20 revenue sources. The starting universe is typically divided into six general source categories:

  1. Contributed
  2. Public/governmental
  3. Membership
  4. Earned
  5. Quasi-equity
  6. Miscellaneous

In the remaining four stages of the tool process, the goal is to reduce the starting universe to a manageable number of individual revenue sources that together will make up the final revenue model for the nonprofit. In later stages of research we may find additional revenue sources that could be added, so this initial universe is just that — a starting point for analysis.

Step 3. Score the initial revenue sources. In this third step, each revenue source in the starting universe is scored for each of the evaluative criterion as:

+2   (very positive in respect to that criterion)
+1   (positive)
0     (neutral or “don’t know”)
-1    (negative
-2    (very negative)

As mentioned above, the revenue matrix tool can accommodate a decision by the Team that some of the factors are more important than others. The spreadsheet formulas can be modified to reflect any weighting decisions.

At a Project Team meeting — typically lasting 3–4 hours — the Team works through the scoring on a consensus basis.

Some of the potential new revenue sources will likely be unfamiliar to team members, and for those a “don’t know” or “0” is perfectly acceptable scoring. When all potential sources are scored against all the criteria, the sources are then ranked by their scores.

We emphasize that although this scoring system will be helpful for a nonprofit, the initial scores and ranks are guidance only and should not be considered an absolute measure of the value of revenue sources. More analytical work is needed before any final commitments are made by a nonprofit to pursue or to drop any revenue sources.

Step 4. Research selected remaining revenue sources. The next step in the process is additional research and analysis. This work is particularly important for revenue sources that score relatively high but for which there were many “don’t knows” in the scoring. Typically these are new revenue sources that a nonprofit has never used but that appear to be intriguing. Conversely, it is usually not necessary to do much if any research on its current well-established revenue streams.

The Project Team will select a number of the higher-scoring revenue sources for more detailed analysis. This additional research should:

  • examine experiences of organizations comparable to the nonprofit,
  • identify grantmakers or other funders who might be interested in this revenue idea for you, and
  • estimate the costs of generating the revenue from this source.

Regarding the last point, it is important to understand that every new revenue source will require an expenditure of some resources to generate those dollars. Examples of what we mean include

  • A “Friends of” organization would require a membership services coordinator, software to track dues paid, and materials preparation and mailing costs.
  • Generating certain new government contracts will require monitoring procedures and conformance to governmental accounting practices.
  • Implementing an earned income strategy will require an organizational culture that is entrepreneurial, and that may in turn require staffing changes.

For some new revenue sources a full-bore business plan may be desirable. This is particularly true for any new earned income venture. We at Triplett Consulting usually do not undertake this business planning ourselves, but we help the nonprofit identify those who can.

Step 5. Select the revenue sources for inclusion in the revenue model. After examining the results of the research, the Team will then select the revenue sources to be included in its final revenue model. After beginning with the original revenue universe, the final revenue model will likely be reduced to less than 10 final revenue sources.

Once the Project Team identifies the revenue sources to be included, each of the revenue categories will be assigned a specific portion of the total revenues. For example, a nonprofit may end up with a balance of contributed income (20%), public (50%), earned income (25%) and miscellaneous (5%).

Step 6. Construct a phase-in schedule. Because it will take time to fully engage new revenue sources, we recommend a multi-year transition to the new revenue model. Typically we suggest a 3–5 year implementation schedule with most of the new sources scheduled for implementation after a 1–2 year development period. We strongly advise against trying to implement more than one new revenue source at any given time.

The following is a link to the Revenue Matrix spreadsheet. These documents are copyrighted by Triplett Consulting LLC., but we want to make them available to anyone who wants to use the Tool to strengthen their own nonprofit. We request that you advise us of your intended use for the tool. Please contact Tom to learn how to adjust the formulas and customize the spreadsheet for your needs. Revenue Matrix spreadsheet

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