piles of pound coins

Charities and profit first

I’ve been thinking a lot recently about charities and profit first (I’ll explain what I mean by that later), sustainability and the pressure which has been placed on fundraisers during the past year.

 

When income no longer matches expenditure, how should charities react?

 

By forcing an unachievable target on their fundraisers?

 

Or by adjusting expenditure?

 

I have just finished work on a 13-month project to help Rowcroft Hospice start to fund an endowment through philanthropy (next week I’ll share more about their plans…)

 

What is an endowment?

 

For those of you who don’t know, an endowment is basically a massive savings account.  Annual interest from the endowment is given back to the charity as unrestricted income, whilst the capital remains intact (and likely grows through a combination of increased investment and good management).

It’s how most charitable trusts work.

The majority of UK charities don’t have endowments (most don’t even have 6 months’ running costs in reserve…) but more are starting to think about setting them up (the RNLI set up their Lifesaving Endowment in 2019), as the short-termism of most of our fundraising practices makes long term planning difficult.

Talk about bad timing, and kudos to Rowcroft for sticking with the project at a time when long term plans for way-in-the-future income have for the most part, been replaced with the challenge of managing a short-term crisis situation.

 

A mindset shift

 

During my first month with Rowcroft and as part of my initial research into the topic of endowments, I came across an article which Blew. My. Mind.

Not only did it make an endowment feel like an achievable and realistic goal (for charities of all sizes), but it also transformed my own thinking around personal finance.

I’ll share the article on the Candid.org blog at the end of this blog so you can give it a read too.

Here is my summary of the article, aka five steps to starting an endowment:

 

  1. Ensure expenditure isn’t greater than income. Reduce outgoings.  More cash in the bank is space to breathe and make good decisions!

 

  1. Create a cash reserve. The belief that charities shouldn’t have one is a myth – working capital can only enhance your reputation, protect against economic downturns.  Less than 3-6 months in ‘crazy’, 12 months more suitable if you’re reliant on a single source of income.

 

  1. Start an endowment, small is fine, add to it regularly, direct excess funds from cash reserve into endowment.

 

  1. Seek good quality investment management

 

  1. Incorporate messaging about the endowment into existing fundraising campaigns. Approach current and potential donors not from a place of weakness / scarcity but from with foresight, vision and with ambitions from growth and strength.

 

So fascinating right?  The first point alone is worth deeper exploration:

 

“Ensure expenditure isn’t greater than income. 

 

Reduce outgoings. 

 

More cash in the bank is space to breathe and make good decisions!”

 

So, so simple.

And yet so hard in a time where income has (for many) reduced and outgoings (demand) haven’t.

As a result, many charities are demanding that their fundraisers work harder to increase income.

 

But it’s not that easy

 

Insisting that we raise more from income sources less hampered by covid restrictions (such as trusts and foundations or major donors), is short sighted and will likely lead to fundraisers who burn out and then leave (presumably to work for an organisation who treats them better).

 

Instead, I believe it would be wiser to ensure that your delivery plans do not exceed your expectations around fundraising.

 

We know now more than ever that living hand to mouth is unsustainable.  But we knew this before the pandemic (at least the writer of the article did). And yet many charities were (and still are) living hand to mouth.

 

Charities and profit first

 

Many small business owners like myself ascribe to the Profit First method for organising their business finances.  Allow me to elaborate:

Most businesses operate using the following equation:

 

Income – Expenses = Profit

 

They deduct their annual expenses from their income and whatever’s leftover is their profit.

Mike Michalowicz, author of Profit First teaches an alternative:

 

Income – Profit = Expenses

 

This equation makes profit non-negotiable and limits expenses to that which is left over.

Of course this model is designed for small business owners and is easy to imagine when you’re starting from scratch.

In the context of charities and profit first,  ‘profit’ equals reserves.

Imagine how different your planning / fundraising might look if you took a little, non-negotiable ‘profit’ from your income.

 

Hand to mouth or living within your means?

 

In an established charity, many expenses (most notably, services delivered to beneficiaries, staff salaries) feel non-negotiable and high stakes.  It can therefore be hard to reverse engineer the Profit First model.

Every stalwart, bastion or principle of good financial management would begin however by advising that living within your means is important but that growth can never occur and security cannot be attained unless one lives below ones means.

The rules for charities have thus far been different.  Reserves which are ‘too high’ can be interpreted as ‘hoarding’ or not delivering on promises to beneficiaries.

I wonder if a small silver lining of this pandemic is that charities will cease to be punished for holding sufficient reserves and will instead be celebrated and supported in their desire to exist for long enough that their charitable purpose is fulfilled.

 

How 2020 has changed things

 

So much income generation for charities is (or at least has been of late) shaky, unstable, unpredictable.  For good and bad.

Let’s look at some of the things which went down in 2020:

 

  • Charity shops closed, some for good
  • Visitor business for heritage and arts charities – disappeared overnight
  • Covid recovery funds which didn’t previously exist – good times!
  • Major donors – worried about the value of their investments (which may well have plummeted) and the impact of covid on their businesses – less likely to give
  • Major donors – wealth relatively unaffected, spending reduced, concern for their local community and for people having a hard time – more likely to give
  • Gifts in wills – never predictable (nor should they be), possible uptake in will making and charitable giving because people’s minds are focused

 

Surely, it’s better to serve fewer people in the short term and to grow slowly and sustainably than it is to face the unexpected closure of services (or God forbid, the entire charity)?

 

Now is a great time to be thinking about long term financial sustainability.  Rainy day funds are essential for a charity’s survival.  In a metaphorical sense, it has rained pretty much consistently for the past 12 months, so no evidence is needed to make a case for futureproofing your organisation so it can serve more people in years to come.

My most positive self predicts the following good things coming from this incredibly challenging year:

 

  • Reduced pressure on short term results in fundraising (Please God let this be so, our fundraisers can’t take much more)
  • A better working environment for fundraisers and more authentic experiences for donors
  • Genuine diversification of income streams with short, medium and long term plans in place

 

Do not even THINK about leaving this page without reading the brilliant Candid article which inspired this post here

 

  • Are you nervous about the short term having suffered a reduction in income during the past year?
  • Is your charity living hand to mouth?
  • Do you need to take an honest look at your finances?

Tony is our resident expert in all things profit, loss and business development.  He has spent his career supporting charities to be more profitable and will give you an honest opinion on how you can best take action to revive your operation.

Email tony@larkowl.uk to arrange a no pressure chat about how we can help get you back on track.

 

 

Posted in Commercial fundraising, Fundraising, Trustees.