Income Diversification Index
Degree to which the organisation’s income is spread across multiple sources, reducing dependency risk
What is Income Diversification Index?
Income diversification index measures how spread out an organisation's income is across different sources. It shows how dependent the organisation is on a few funders or customers.
Depending on one or two sources of income is risky, especially for charities and public bodies, so a healthy spread adds resilience.
How this KPI is measured
- Function
- Finance
- Sub-function
- Financial Sustainability
- Industry
- All Industries
- Type
- Lagging
- Impact
- Financial control
- Unit
- score (%)
- Measurement frequency
- Annual
- Formula
- Herfindahl-Hirschman Index applied to income streams, or % from largest single source
How to calculate it
Apply the Herfindahl-Hirschman Index to the income streams, which is the sum of each source's squared share of total income, or simply report the percentage from the largest single source.
For example, if the largest source provides 40% of income, the concentration is 40%. With shares of 40%, 30%, 20% and 10%, the index is 0.16 + 0.09 + 0.04 + 0.01 = 0.30.
A lower index means more diversity. Track it over time and by source type.
Where it is used
Managing funding risk
See dependence on few sources.
Planning fundraising strategy
Grow new income streams.
Reporting to boards
Show resilience.
How to improve it
Tips and common mistakes
- Diversification takes time and investment.
- Some concentration may be unavoidable.
- Consider the reliability of each source.
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