The way charities generate the funds needed to deliver their mission is changing, and the data points to a more complex funding environment persisting. This will require new ways of working and the development of new capabilities, and experts stress that ensuring organisations are in the right shape to take advantage of emerging opportunities is key.
Last year, a Charities Aid Foundation and Acevo survey asked third sector chief executives what challenges their organisations face. Generating income and achieving financial sustainability was among the three most pressing concerns for 60 per cent of the 572 respondents. Nearly 30 per cent of organisations highlighted reduced government funding as a key issue for their charity.
Meanwhile, 78 per cent of chief executives reported increased demand for their services over the previous year, and 83 per cent were expecting a further increase in demand over the next 12 months.
In response, almost 80 per cent of respondents either have or intend to diversify their income streams.
“We are meeting lots of charities who face a challenge of generating more income and being more commercial about the way they do that,” says Dina Henry, chief operating officer at CAF Bank. “Charities face enormous challenges at the moment because they are trying to increase awareness, bring in donors, and raise funds.”
The Grants for Good campaign, recently launched by a coalition of third sector groups, has highlighted the sharp decline in public funding for charities. The campaign points to data that shows grants declined from £6 billion in 2003 to £2.2 billion in 2012/13. Over that time income from government contracts has followed the opposite trajectory, increasing from £4.8 billion in 2000/01 to £11.1 billion in 2012/13.
NCVO’s Civil Society Almanac 2015 revealed an increase in trading emerging as a key trend, due to charities responding to the prevailing financial pressures.
The sector generated £22.7 billion through trading in 2012/13, nearly double the £11.9 billion earned in 2000/01. Organisations are now also securing more earned income from individuals than from donations or legacies.
An increased focus on trading is a trend Will Prochaska, head of access to capital at consultancy Baxendale, has witnessed first-hand.
“Charities are increasingly coming to us looking for help to grow their trading income,” Prochaska says. “They may be looking for support to run their services more profitably, secure new contracts, or to launch new business streams altogether. Our clients have already identified areas where they can grow or make savings and they want help to test their assumptions and develop their business plans.”
Whether a charity looks to branch out or ramp up activities there will be a range of factors to consider. How the new or expanded activity will be paid for is a critical factor.
Grants, whether public or through trusts and foundations, remain an option, or charities may be fortunate to have sufficient reserves in cash or investments to draw upon. And of course UK charities are fortunate to operate in one of the most generous nations in the world, illustrated by CAF’s annual World Giving Index repeatedly placing the British public among the most generous worldwide.
And increasingly charities look to finance facilities to fund a project or activity, which opens up a range of considerations. While relatively unchartered territory in the past, Cogent Ventures director Jim Brooks says many charities are now well equipped to understand their options.
“Going back three to five years, a lot of trustees wouldn’t have considered taking on repayable finance but it’s not the taboo subject it used to be,” he says. “Charities really do get the commercial sector, they’ve been facing the harsh realities of this funding environment for some time.”
The options vary. Secured and unsecured lending is available through ‘conventional’ banks and lenders, and alternative finance options are being developed elsewhere.
There is an increasing drive from the government among others to build momentum behind social investment – where a lender or lenders invest in institutions for social as well as financial returns. Instruments to connect social investors with third sector organisations are being developed all the time, by specialist and more diverse financial institutions and investment houses.
Planning and preparation
New income streams bring new challenges and require different capabilities, so charities are urged to ensure their organisations and processes are properly equipped to cope with and thrive in the new normal.
Whether considering approaching grant funders or lenders, increasing fundraising activity or taking on contracts, experts suggest investment readiness principles can be usefully applied to increase the chance of success and make for a smooth process.
For charities, Brooks says this starts with impact.
“It’s really important because it needs to drive strategy,” he says.
“If we’re working with organisations on a business plan the very first thing we do is help them to articulate their theory of change, because then you understand how the organisation benefits people and the strategy becomes about how you maximise outcomes.”
Prochaska agrees that keeping the charity’s mission at the forefront of all planning and decision making is crucial. Doing so will guide what sort of activities the charity should be undertaking in terms of its public benefit and exposure to risk.
And while diversification of activities and income streams takes on increasing importance in the current climate, Prochaska says charities have a greater chance of combining growth of revenue with increased impact when operating in markets within which they have existing experience.
“Launching a new business in an area in which you don’t have a track record carries risk, and when doing so charities should be realistic about their ability to achieve both profits and impact from day one. A charity’s social mission must be prioritised. Expansion or diversification should always be designed to support an organisation’s impact, whether directly or indirectly.”
Brooks says that charities should think “very carefully” about the information that potential investors will need to make decisions when approaching potential funders.
“Business plans that some charities have produced in the past tend to be internally focused, rather than specifically investment focused. We always recommend to our clients that they keep business plans focused on impact, market and the finances, and also try to condense to below 40 pages rather than writing War and Peace.”
Cost will naturally be a major factor in deciding on whether and how to grow and diversify, and how the activities will be paid for.
Delivering contracted services carries a cost, and application processes can too. In terms of finance, rates vary widely between secured and unsecured options, and based on the risk appetite of the lender.
Henry says that the affordability for the charity and the impact on its ability to deliver on its mission is an important consideration from CAF Bank’s perspective as a lender.
“One of the key things for us when we’re lending is affordability for the charity – that it’s not going to stretch them. Another is that if for any reason it wasn’t viable or working for them, as best we can, making sure the security for that particular loan wouldn’t mean that the charity couldn’t continue.”
Many charities will have the expertise in house to consider these options and put them into practice via a business plan or theory of change. Henry says very often charities will have someone with financial experience on the board, alongside trustees with specialist knowledge of the mission and the sector.
Henry says CAF Bank itself has published material to help charities through the decision-making process and demystify the financial options available.
Consultancy services are available, and there are grants on offer to help organisations get themselves into shape to access the funds they need for expansion. Overall, Prochaska says charities looking to diversify or expand should try to start the process earlier rather than later.
“Charities should ensure that they devote enough resource to planning their growth or diversification. Understanding the skills that are needed to operate a new or expanded venture is critical, and if you’re looking at finance for growth then you need to be speaking to investors early.”
Matt Ritchie is the editor of Charity Times
Article published in association with Charities Aid Foundation
Business Acumen for the Not-for-Profit Healthcare and Charity Sector