Five Minutes for Finance - Program Cross-Subsidization
Cross-Subsidization of Programs in Nonprofit Organizations
Nonprofit organizations often operate multiple programs that serve diverse constituencies, address varied community needs, or fulfill different aspects of their missions. These programs, however, do not always generate the same level of funding or operate at the same cost-efficiency. To manage this financial reality, many nonprofits rely on a strategic practice known as cross-subsidization—using surplus revenue from one program to support another that may be underfunded or running at a deficit.
Some might ask - why would a nonprofit continue to operate programs that generate deficits? One way to look at how a nonprofit can understand and evaluate its program portfolio is the Mission/Money Matrix. The article, by Jeanne Bell and Steve Zimmerman, discusses the “Dual Bottom Line” concept and how an organization’s programs fit into its overall strategy.
Understanding Cross-Subsidization
Cross-subsidization occurs when income generated from a financially strong program—such as a popular training workshop, a government contract, or an earned revenue stream—is used to fund other programs that are mission-critical but financially weaker. For example, a nonprofit might run a fee-based counseling service that consistently produces net income, and use those funds to subsidize a community outreach program offered at no cost to participants.
This internal transfer of resources allows an organization to maintain a broader range of services, ensuring that programs serving the most vulnerable or marginalized populations are not left unsupported simply because they do not attract sufficient funding on their own.
Strategic Benefits
Mission Fulfillment: Cross-subsidization enables nonprofits to sustain important but less profitable programs that are central to their mission.
Financial Flexibility: It allows organizations to adapt to funding variability and reduce dependence on restricted grants or donor-designated gifts.
Program Continuity: By balancing financially successful programs with those that need support, nonprofits can maintain stable service delivery even during periods of fluctuations in funding.
Risks and Challenges
While cross-subsidization can be a powerful tool, it carries certain risks if not carefully managed:
Lack of Transparency: Funders and stakeholders may question the use of unrestricted revenue if cross-subsidies are not clearly communicated and justified.
Sustainability Concerns: Over-reliance on one revenue-generating program to support others can jeopardize the entire organization if that key program faces financial strain.
Mission Drift: There's a risk of prioritizing revenue-generating programs over those with the highest mission impact, potentially leading to a misalignment between financial strategy and organizational goals. This is sometimes referred to as “letting the tail wag the dog.”
Best Practices
To responsibly manage cross-subsidization, nonprofits should:
Track Program Costs and Revenues: Implement cost allocation methods to understand the true financial performance of each program.
Communicate with Funders: Be transparent about how unrestricted funds or program income are used to support the broader mission.
Review Regularly: Assess the sustainability and impact of each program to ensure that cross-subsidization is achieving desired outcomes.
Develop Diverse Revenue Streams: Reduce risk by building multiple sources of unrestricted revenue to spread the financial load.
Conclusion
Cross-subsidization is a common and often necessary financial strategy in nonprofit organizations, enabling them to deliver a full spectrum of services even when some programs are not self-sustaining. When executed with transparency, accountability, and strategic oversight, it becomes a valuable tool to support long-term mission fulfillment and financial resilience.
About this Series
Subsequent articles in this series will cover other topics related to nonprofit financial management. Here is a list of, with links to, previous articles:
About the Author
For over 30 years, Robert Pascual has been a leader in nonprofit financial management as a CFO, consultant, conference speaker and educator. He holds an MBA from the Haas School of Business at the University of California and is the founder and principal of Robert Pascual, MBA LLC. He has worked with small, mid-size, and large nonprofit organizations spanning the fields of education, workforce development, housing, health, philanthropy, social services, media, fiscal sponsorship, nature, and the environment. Each of these organizations has faced both unique and common challenges, some of which are probably similar to ones that you wrestle with.