Finance, Funding and Sustainability

Financial planning is very important. As an organisation you need to understand what your objectives are and what resources [finances/ people] may be needed in order to meet and achieve these objectives.

When considering finances for your organisation it is useful to consider the funding mix. That is you’re trying to ensure that you are not over reliant on one source of funds. A good rule of thumb is to ensure that no more than 25% of your funds come from one source. The National Council for Voluntary Organisations [NCVO] has created a quick checklist and funding risk assessment tool. Download here.

The 25% rule is also a key figure used by commissioners [particularly public sector] when they are considering the risks involved in contracting with an organisation. It is unlikely that you would achieve a contract value of more than 25% of your turnover.

Types of Funding

Grants are still a source of finance for a social enterprise or a voluntary group, but these are in decline and have more competition than before. Funding Central is a government funded database with grants and contracts; if you haven’t created a profile you may want to click this link.

Contracting is a good way to achieve funds, but does need to be considered fully. Is your organisation ready and able to contract? Be sure you can deliver the contract at the price you are tendering for. Public sector contracts are listed on the Contracts Finder website.

Loans and investment are a potential part of the mix, loans will need to be paid back and most investors will also want to see a return on their investment. A good place to start on investment opportunities is Social Investment Business.

Fundraising there are many ways to fundraise, but this can be time consuming and resource intensive at times. You’ll need to be sure that the investment in time is worthwhile.

Sales are a good way to raise funds. Sales are likely to be more sustainable and predictable in future years and the income is unrestricted.

There is a useful page on funding mix [particularly geared toward charities considering trading] on the Sustainable Funding Wales website here.

Restricted and unrestricted funds

It’s important to understand the difference between restricted and unrestricted funds and try to ensure your organisation has a sensible balance within your funding mix.

Restricted funds often come in the form of grants and contracts. That is the funds are given for a specific purpose. For example, you may get a grant to develop a website. You must ensure that these funds are spent for this purpose or you are likely to have to pay them back, even if you’ve managed to develop a website with a volunteer.

Contracts are usually restricted too; that is you are being paid to provide a particularly service. The funds can’t be used for something else, because if you don’t deliver the service you’re likely to have a ‘clawback’ of funds. However, ‘clawback’ is declining in contracts as more and more move to a ‘pay by results’ model. The payment by results model creates greater risk. If you are delivering a pay by results contract you need to be positive you can meet the outcomes and have sufficient funds to bank roll the work until payments are received.

Unrestricted funds are the most useful in many ways as they can be spent on whatever the organisation sees fit [subject to law etc.] Some grants will be unrestricted, but they are few and far between. Sales of goods or services are generally the best way to generate unrestricted funds.

Surplus / Profit

Within your financial planning you need to be mindful of making a surplus or profit. The recommended level of surplus is at least three months operational costs and ideally six months i.e. the organisation should aim to achieve a surplus that will allow it to fully operate without any income for at least three months. Remember charities make a surplus and are not [subject to certain thresholds] subject to Corporation Tax [note see charities and trading guidance] whilst a CIC would make a profit and is subject to Corporation Tax.

Resourcing Objectives

When you’re considering the financial planning for your organisation you need to understand the resource implications to meet your objectives. The table below gives examples of what resource implications certain business objectives may have. This is not meant to be an exhaustive list.

Business Objective  Resource implications
Diversify funding streams to be less reliant on grant funds Assess base
Train staff to write applications
Introduce fee charging services
Tender for public sector contracts
Set up trading arm to enable gift aid and reduce tax liabilities
Improve and increase marketing activities

There is a more detailed example in the comprehensive guides section – ‘It’s an idea but is it a business? A guide to third sector trading’, produced by WCVA you can download it here. This resource is particularly designed for charities and voluntary groups who are considering trading activity.

Full Cost Recovery

Full cost recovery is exactly ‘what it says on the tin’. To identify all the costs associated with a particular project or service area and ensure you recover the full costs of delivering the service. Put quite simply if you don’t understand all the costs associated with delivering a service or producing a product you are likely to go bust.

Where third sector organisations sometimes make mistakes is in expecting to recover all the costs from one funder or apportioning too much of the overhead costs to a project. This isn’t always achievable, as many funders will not pay for many overheads [sometimes called core costs] associated with running the organisation.

The main principles to be aware of are:

  • Ensure you understand all of the direct costs associated with the delivery
  • When looking at apportionment [indirect /overhead costs] the principle of ‘fair and reasonable’ is the approach to take

The full cost recovery model needs to work on the fair and reasonable principles, as the days when an overhead [indirect cost] could be charged out at a simple % have gone. This is because different projects require different elements and levels of overheads.

For example, if you are running a youth club and the youth club only uses the premises for one evening a week, the rent, heat and light charges may be very small, but would still be part of the full costs of running the activity.

You would need to work out the amount of time the space was used compared to how much time the space was available to others [whether it was used by others or not] and make an appropriate proportionate [fair and reasonable] charge.

If however you hired the space from an organisation for X hours per week, the cost would simply be a direct cost of however much you paid or intend to pay. Of course here the amount should also be within the market rates for such an activity.

The Association of Chief Executives of Voluntary Organisations [ACEVO] have created a comprehensive excel format toolkit to work out full costs and can be downloaded here the toolkit has excellent narrative and explanations on terms such as direct costs and indirect costs.

The Big Lottery also provide extensive guidance on full cost recovery, you can download their guides here.