Kate Sayer: Understand your business model

Defining the financial objective of activities will help to determine attitudes towards risk, a pricing policy and the appropriate level of investment

Kate Sayer
Kate Sayer

Before you start planning, it is important to fully understand your current business model – the way that demand for services and funding for them come together. Your business model, or a combination of different models, provides the first indication of the style of financial management and financial strategies your charity needs.

Some research might be needed to provide information about the profile of existing activities: do they contribute to overheads and recover all costs? The first step is to work out the purpose of each activity and whether its financial aim is to make a surplus or profit on the activity, to break even or to subsidise.

Your charity might also have sources of unrestricted funds such as legacies, regular giving and donations. These can be included as "profit-making activities" or described in a separate category of activity to generate independent funding.

Defining the financial objectives of activities will help to determine attitudes towards risk, a pricing policy and the appropriate level of investment.  

You also need to understand how demand for your services arises and how this links to the funding mechanism. For example, a performance-related contract to deliver advisory services to job-seekers that relies on other agencies to refer people is a high-risk business model. In the real-life example of Kids Company, its business model supported an operating principle that "no child should be turned away", but it needed to be underpinned by a stream of funding it could draw on as needed or very large reserves.

Having a number of different activities with different financial aims and profiles helps to manage risk, but the balance needs to be right. The majority of business failures are a result of cash-flow problems due to over-trading, so pacing change and ensuring the change is funded is really important. A portfolio approach has a number of aspects.

First, not all new ideas will succeed, so having a number of different ideas increases your chances of some success. It makes sense to try out a number of different new funding ideas on a small scale initially.

Second, different activities will be popular at different times of the year or at different points in the cycle. If your charity helps long-term unemployed people to find jobs, you will have little demand for services in times of high employment. You might therefore want to think about another service for a different group of people or to tackle a different need.

Finally, different activities have different funding models with different levels of inherent risk, such as payment by results, quarterly instalments of grant funding in advance or membership fees collected at the beginning of the year.

The key is to understand your activities in terms of their business models and ensure that you have a portfolio approach.

Kate Sayer is senior consultant at specialist auditors Sayer Vincent

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