How charities can diversify their income streams
by Liza Ramrayka, Guardian Professional, Friday 27 April 2012
Many charities are rethinking their financial model and exploring more sustainable options, such as earned income or loans
Recession, budget cuts and the localism agenda are just some of the factors driving voluntary and community groups to rethink traditional income sources in response to changing circumstances. With increased competition for grants and donations, many organisations are having to rethink their financial model and explore more sustainable options, such as earned income or loans. But what does this mean in practice for the finance team?
Epilepsy Scotland decided to take the leap into social enterprise. The charity was looking for an innovative initiative that could deliver a long-term, sustainable funding stream based on future trends that could exist alongside traditional funding opportunities. Online shopping was identified as a growth market, and payment systems were recognised as an element of that sector which could deliver ongoing income from one-off sales.
Launched last year, CharityClear is a payment service provider that delivers payment authorisation to online merchants with 100% of the profits going to Epilepsy Scotland (CharityClear was set up as a community interest company). It is the first such payment provider in the UK.
Gordon Quinn, sales and marketing director at CharityClear, was a trustee of Epilepsy Scotland when the idea began to get off the ground three years ago. For him, the greatest challenge was to win over his fellow trustees who had to sign off on a £150,000 investment with little or no previous knowledge of the online payments market. "The main challenge to overcome was the fact that CharityClear was a bold idea whose operations were nothing to do with epilepsy," he explains. "The returns, however, would be directed to services and activities to benefit the 54,000 people living with epilepsy in Scotland."
In addition to the initial investment, the finance team also had to work into its planning an ongoing financial commitment to CharityClear through the period before achieving a profit. The charity's finance and fundraising teams work closely with CharityClear to track income.
Jane Arnott, acting head of advice and consultancy at the Charities Aid Foundation, agrees that trustees' attitude to risk is vitally important and says the finance team should work closely with the board to communicate ideas for new income streams. "We advise charities to think about corporate engagement as a partnership and what the benefits of that partnership are," she says. "It's an opportunity to develop the skills of their staff – particularly if you come from a background of writing applications for grants, which can be quite transactional."
Arnott says the shift away from unpredictable income streams is becoming more widespread. "Organisations are looking to diversify their funding portfolio and looking at more innovative ways of income generation," she says. "They are also looking at how to maximise existing funding opportunities such as payroll or corporate giving."
According to a salary survey conducted by Charity Finance Group last year, finance teams have not experienced the same levels of staff cuts as other areas. However, they appeared to be working longer hours, a possible indicator that they are taking on other responsibilities such as IT and HR as other teams are squeezed. The challenge for many finance teams is how best to "skill up" with limited resources.
Partners of Prisoners and Family Support Group is a medium-sized charity set up in 1988 to provide advice and help to offenders and their families across the UK. It has recently set up a trading arm to provide refreshments for offenders' families in visitor centre tea bars. Its social enterprise – 2nd Chance – provides sandwiches made by offenders and ex-offenders and sold in the tea bars.
"We needed to invest in upskilling staff with the ability to write and manage tender opportunities," says Zoe Gan-Rankin, the business development manager. "We also had to develop an understanding of trading and tax law to legally and efficiently manage our income generating activities." To embed the concept across the organisations, key staff were also given training, such as Acevo's"financial management for non-accountants" course. The charity also expanded membership of the board, recruiting trustees with legal or corporate finance experience.
When youth engagement charity The Otesha Project UK was launched in May 2007, the organisation was entirely funded by grants. By the second year, earned income accounted for one-third of its income, generated through running school workshops and educational cycle tours. More recently, it has added greener workplaces training to its services and is currently looking at setting up a community interest company for such activities.
Founder and project director Liz McDowell explains that, unlike a grant where you receive the money up front or in instalments, earned income means issuing invoices and being paid afterwards – and after paying for much of the related outgoings, just as a business does. "Without grant funding, we wouldn't have the cushion to achieve this unless we resorted to taking out a loan," she says. "In terms of financial planning, this change has made our cashflows a much more important part of the planning, monitoring and bookkeeping tasks."
NCVO recently surveyed subscribers to its funding and finance e-newsletter to find out where organisations thought income opportunities for them were over the next five years. Of the respondents, 60% said donations or grants offered medium-sized opportunities, 50% said contracts and 44% opted for trading. Asked about high opportunities for income, respondents were divided equally between the three areas.
NCVO's sustainable funding project offers a mix of online and face-to-face resources including books, blogs, guides, consultancy and training (such as the forthcoming grow your own income course). Jess Farr, sustainable funding officer, says new skills will depend on the funding route they take. For example, trading requires the team to forecast and monitor profit margins, turnover, costs and capital investment. And an understanding of the difference between different types of trading will also be extremely important for tax purposes.
Finance professionals can also seek informal support via specialist forums, such as the KnowHow NonProfit funding forum.
Quinn at Epilepsy Scotland says changing mindsets is half the battle: "The charity is taking a long-term view in establishing this enterprise, to develop a consistent income stream to lessen reliance on extremely valuable but unpredictable sources of income."