Finance: Outlook - Beware the restricted income pitfall

Stephen Brooker, a consultant specialising in governance and financial strategy

The maintenance of sustainable core funding can ensure flexibility.

When I heard about the latest earthquake in Indonesia, my first thought was that it was fortunate indeed that there would be plenty of agencies with staff and material in the area affected by the devastation.

I feared, however, that some of these agencies could be caught in the restricted income trap. Income donated in response to the original Asian tsunami appeal would not necessarily be able to be diverted to fund work following another, separate disaster.

In fact, the Disasters Emergency Committee has decided that it can use the tsunami money, so the problem in this case is solved. Some of the agencies will have other funds they could have drawn on, but it would have been regrettable if others had been forced to stand by, unable to help.

Perhaps this is not of much relevance to the majority of us, struggling on with our regular work, fundraising in the gaps left by the big players. Not so, in my experience.

Many charities secure funding for a particular project or programme, carry it to a successful conclusion and then find there is money left over that they cannot spend on anything else.

As Clare Thomas of the Bridge House Trust said recently, donors like to feel their funding is really going to make a difference to the world (Third Sector, 30 March). This is as true of the private individual as it is of a large organisation such as the Bridge House Trust.

Fundraisers often get drawn into narrowing the focus of a campaign or grant application in order to meet this requirement. After all, 'making a difference' is the whole point of the voluntary sector - it exists to put right or rebalance the outcomes of the market place and government activity, or inactivity.

However, the viability of a charity can be threatened if too much of its income is earmarked for a defined purpose. There will be no flexibility to respond to the unexpected - not just earthquakes, but, for example, requests from a client group for extended support or meeting a need beyond that narrowly defined in the funding paperwork.

Finance directors, chief executives and trustees all have a role to play in ensuring that a charity maintains enough sustainable core funding to ensure its viability as an ongoing concern. This means being aware of the restricted income trap, and indeed of the necessity to ensure full cost recovery. That, however, will have to wait for another time.

KEY POINTS

- Fundraisers often get drawn into narrowing the focus of a campaign or grant application in order to fulfil their donors' wish that they 'make a difference'

- A charity's viability can be endangered if too much of its income is earmarked for one single purpose

- This will lessen a charity's ability to respond to unexpected events such as the Asian tsunami

- Finance directors and chief executives have a role to play in maintaining a sustainable core income.

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