Expert View: Expansion - Growing pains of increasing activity

Charities often approach Venturesome looking for funding to help them grow, usually driven by the pressing social needs they see.

The first question we ask is whether expansion is the best way of tackling that social need: how do you know your activities are effective? Are others doing a better job? Is yours the most cost-effective solution to the problem? Even if you can answer in the positive, there are still some common organisational and financial pitfalls to avoid.

Many organisations that approach us are keen to develop trading activities. Even where trading is related to your organisation's heartland, such a move can require considerable cultural change and have unintended consequences. One charity developed a consultancy service for companies that wanted to develop and implement environmentally friendly policies. An organisational shift was required - employees were used to working on restricted grant projects, not seeking commercial opportunities. As a result, staff turnover was high and growth took a lot longer than expected. It's vital to keep people on side.

A failure to grasp the increased need for working capital that often accompanies growth has undone many an organisation. Many charities experience a mismatch between fixed monthly expenditure (rent, salaries and so on) and lumpy income from uncertain grant funding. It can be difficult to access funds to cover the shortfalls, so when planning growth it's important to ensure you will have sufficient reserves or can at least access this kind of money should you need it.

The most important element to understand is your organisation's existing financial model and the impact that growth will have on it. I'm talking to two trading organisations that are not breaking even at their current level of activity, but are confident that investment would enable them to increase activities and generate sufficient income to cover their fixed costs. It's a high-risk strategy: can economies of scale be achieved?

But at the same time, not growing may not be an option. Third sector organisations are lauded for their innovatory nature and have to be able to change and adapt, which may mean growth.

Few can afford to stand still - if not financially, then in terms of responding to changing social needs.

 - Emilie Goodall is investment manager of Venturesome, part of the Charities Aid Foundation

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