Finance Focus: Diversify the right way

As traditional funding streams start to dry up, charities are having to seek new sources of income. But, as Edward Lander reports, it requires courage and the bravery to fail

Catch22: diversified
Catch22: diversified

Charities have long been advised to diversify their income streams to secure their future finances. The benefits of diversifying go far beyond simply achieving an income surplus. Diversification also gives organisations the security needed to focus more on long-term strategies and ultimately have more impact for their beneficiaries.

But charities often turn to the strategy only after losing their main source of funding. "They ring us to say ‘we’ve just lost a massive grant; how do we get some corporate support?’ And sadly the answer is that you can’t," says Steph Taylor, senior advisory manager at the Charities Aid Foundation.

Taylor says it takes time for charities to consider their options and between 12 and 18 months to build a corporate partnership or secure a major donation. But the process also provides an opportunity for organisations to increase their brand reach, explore new innovations and broaden their networks, creating further avenues for volunteering, resource sharing and funding.

Key role

Charity finance directors can play a key role in identifying and factoring in risks associated with diversification. And there are plenty. If charities expand too quickly or over-diversify, they might not have the capital, overheads or capacity to follow their plans through. Or, as was the case with the sight-loss charity RNIB’s commercial department, RNIB Solutions, if the figures and forecast for expansion are lower than expected, the resulting loss could affect an organisation’s wider resources.

Meanwhile, the actions of new corp-orate partners could cause damage to a charity’s reputation further down the line. And that lucrative donor agreement can come with unforeseen admin costs.

"The donor might decide they’d really like a report on what’s happening and a stewarded visit every few months, and would like to bring their friends along," says Taylor. "And before you know it your chief executive’s spending one day a week looking after that donor."

There are also reputational risks linked to income diversification, which can affect how people perceive and engage with an organisation.

"If you end up delivering government programmes and get more closely aligned with the welfare state, your traditional donors might stop giving you money because they assume your money is coming from somewhere else," says Simon Teasdale, professor of public policy and organisations at Glasgow Caledonian University.

Perhaps most worryingly, the process could dilute and undermine the core values and mission of a charity.

This all sounds alarming, but most of these risks can be avoided or at least alleviated with careful planning and a pragmatic approach to unexpected challenges.

"I think we’re going to have to be able to accept failure much more in the charity sector if we’re going to come up with new ideas," says Mark Salway, director of social finance at City University’s Cass Business School.

Salway says that, before any charity even starts to consider whether income diversification is right for it, it should have a clear understanding of its balance sheet and carry out a governance review. This will give it the confidence to ask the right questions and identify any problems and opportunities along the way.

‘Looking around’

"It’s understanding your model, your practice, where your income streams are, and then it’s about looking around you," says Andrew O’Brien, director of policy and engagement at the Charity Finance Group. "See what other organisations in your area are doing and look at the overall wider economic picture."

Some of the most high-profile recent examples of income diversification have
involved charities such as the British Heart Foundation launching their own online stores. But the charity’s chief financial officer, Martin Miles, says: "Diversification doesn’t necessarily mean extending into new areas, but can often be about evolving your existing operation and working out how to do it better."

The RNLI is currently using this approach to consider innovative ways of generating income, including the possi-bility of marketing its specialist training skills in drowning prevention and even commercially producing the organisation’s lifeboats.

The main challenge charities face when they are diversifying income streams is finding the resources and skills to implement their plans.

Organisations can look for opportunities to address these gaps by seeking external help through their network of professional and corporate partners.

Ultimately, however, the success of any income diversification strategy will depend on the support of the people who joined the charity to make an impact.

"If you can get the story right, people from your organisation will engage with it," says Martyn Drake, founder of Binley Drake Consulting.

"They will want those skills because they’ll understand why it’s valuable not just for the charity, but also for the people it supports."

And that, he says, means finding the "sweet spot" between what people are
passionate about, the unique value that the organisation can provide and how this aligns with its mission.

Topics:
Finance Feature

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