We’re now in the seventh month of the COVID-19 pandemic, with very little daylight in sight. Many nonprofits have made it this far through a combination of PPP loans and emergency donations. If the last recession in 2008-10 is any guide, the coming year is going to be tougher than this year. We’ll know more after we see what year-end donations look like this year compared to last, but the prognosis already looks challenging.

As the likelihood of a prolonged downturn looms, thoughts are moving from financial survival to financial sustainability. We define financial sustainability as having enough repeatable and reliable revenue to cover operating costs with enough left over to set aside for emergencies and long-term investments. That concept may feel aspirational even during the best of times, but part of the point of doing sustainability planning is to understand what a sustainable model might look like for your organization. Even if getting there could take ten years, at least you have an idea of what you’re steering toward and can communicate that vision to funders, board members and other stakeholders.

To get started on sustainability planning, we first have to get some misconceptions out of the way before we can talk about where you should start.

Here are five myths that we regularly encounter, and the truths that you should pursue instead:

Myth #1: Conflating Stability with Sustainability. Board members, funders and nonprofit leaders often mistake stability—breaking even or better each year—with sustainability. You can be stable by bringing in one-time revenue sources—a big grant, a contract—but if those sources are one-time, they can, by definition, come and go, and your stability can go away just as quickly.

Truth #1: Distinguish one-time vs. repeatable revenue. Sustainability depends on having repeatable revenue sources—e.g., annual giving that’s consistent or growing over time. That doesn’t mean that there won’t be waxing and waning on a year-over-year basis, but the source will not disappear entirely. Review your revenue sources and identify the ones that have been part of your financial history for more than three years—those sources will form the core of any sustainability plan.

Myth #2: Diversifying revenue sources. We talk about two kinds of diversification with our clients: horizontal vs. vertical. Horizontal means that you get support from a lot of different types of revenue (government, foundation, individual, earned, etc.). When people say they need to diversify revenue, they’re usually talking about horizontal diversification. For most nonprofits, horizontal diversification isn’t a good idea because each revenue type will require a different kind of skillset to access and manage. For small- to mid-sized nonprofits, the cost of acquiring and maintaining each of those skillsets is too high.

Truth #2: Diversify vertically, not horizontally. We prefer to see our clients diversify vertically. To put it in plain English, it’s better to go deep than go wide. Vertical means that you have specialized in one type of revenue (e.g., major donors) and have many different sources of that revenue, no one of which represents more than 10% of the total. If you get state contracts, can you expand or diversify those contracts? If you get individual donations, can you increase the number or average size of those gifts?

Myth #3: Pursuing silver bullet revenue. Many nonprofit organizations fall into the cycle of relying on high-cost, low-profit, revenue generating ventures. These sources, be they special events or earned revenue ventures, cost so much to pursue in both time and money that the net gain is often barely offsetting. For example, it takes years to build a profitable earned revenue program, and if you’re not already in the business of operating, say, a taco stand, going into that business as a way to employ clients and make money could pull you under.

Truth #3: There are no quick fixes. Bringing a new revenue category into the mix will take time, patience, and discipline. Even if you have all three, the risks may outweigh the benefits. If you’re short on time, an attempt at a quick fix will likely make your problems worse.

Myth #4: Build your revenue plan around your impact goals. We’ve seen too many business plans with a flawed premise: in order to determine your revenue target, you start by estimating the cost of delivering programs at the scale needed to get the impact you want to have. While cost-to-impact data have their uses, they are not relevant as the basis of a revenue plan.

Truth #4: Build your revenue plan around market data. Revenue plans have to be built around market research. If you’re considering individual donors, you start by asking:

• How many individuals are there in a particular region with incomes between X & Y?
• How many of them give to charity?
• Of those who give to charity, how many give to your social issue?
• How many other organizations are also trying to address that social issue and compete for the same donor dollars?

Myth #5: If you know what an individual program costs, you know what you need to raise. We can blame the purveyors of the idea that overhead has nothing to with delivering programs for this fallacy (See The Overhead Myth). The fact is that everything that goes with running your organization—administration, fundraising, employee benefits—is part of what it costs to deliver any given program. The common term for this is fully loaded costs.

Truth #5: Understand fully loaded costs. You can only build a plan for sustaining your organization by understanding everything that goes into delivering your services, not just the direct costs. This isn’t about accounting and arcane rules of allocation. You can keep it simple. If you have three programs, you can weight your administration and development costs for each program based on the percentage of the total budget that each program represents proportionally.

A bonus truth: Test, fail-fast, one idea at a time. Your road to sustainability will be paved with a set of assumptions that you will test and quickly advance or discard. If an idea does not pan out in the time you’ve allocated for it, move on. Don’t throw good money after bad because you’ve already sunk costs into a bet that’s not going to pay off.

Ready to begin planning for financial sustainability in a time of uncertainty? We’re presenting a free webinar, “Making Strategy In Uncertain Times,” on Thursday, November 12^th from 10:00 a.m. to Noon, presented by the MA Community Foundation Collaborative in partnership with Mass Nonprofit Network and Philanthropy Massachusetts. To register, click this link.