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Income risk, sustainability and diversification

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Income risk, sustainability and diversification

Julian Lomas

CFG Annual Conference 2019

I was delighted to co-host with Helena Wilkinson of Price Bailey Chartered Accountants, an in-depth workshop on income risk, sustainability and diversification at the Charity Finance Group (CFG) Annual Conference 2019, sponsored by Grant Thornton.

During the workshop we had lively discussions exploring issues around how charities can become more financially sustainable, including looking for different income sources, income trends over the last few years, how this affects how charities raise money and what can be done to change a charity’s income mix. The workshop included practical breakout sessions to explore ideas further, including a session for delegates to assess their own charity’s sustainability and income risk profile using a simple tool developed by us at Almond Tree Strategic Consulting.

Assessing your charity’s sustainability

The tool we used was developed to provide an at a glance assessment of the charity sustainability. It is a pared down version of a bespoke tool we developed with our regular client Adviza Partnership, a careers education, advice and guidance charity serving the Thames Valley and South West of England.

This simplified framework is designed to be used annually to consider the sustainability of a charity using 8 dimensions of organisational sustainability (or resilience); 4 focussed on financial health and 4 on wider criteria that impact strongly on a charity’s ability to generate income and deliver for beneficiaries. Other, bespoke, dimensions can be added or tailored to reflect the specific needs of any particular charity including the sector it operates within, the services it offers and its capacity/capability needs .

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To use the tool, senior managers and Trustees should reach a judgement on their charity’s current strengths or otherwise in each dimension of the framework, assigning a score from 1 to 5 for each guided by the example criteria set out here. These are not intended to be exhaustive descriptions of any situation that may arise but rather to illustrate the type of scenario that should give rise to a particular score against each dimension.  Judgements should be reached in the light of an assessment of the prevailing circumstances in which the charity operates and the risks it faces.

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Nodes should then be added to the diagram to reflect your charity’s score in each of the dimensions in this assessment framework. These nodes can be joined by lines to aid visualisation of the scores. Care should be taken in using these 8 scores to reach an overall judgement on sustainability as the relative weight of, and implications attached to, each dimension will depend on the prevailing circumstances. Subsequent years’ assessments can be added in different colours so that change can be tracked. An anonymised example of the use of this framework (with a different client) is provided below and should be interpreted using the key to the right.

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What you can see here is that this medium-sized charity had something of an income shock in the 2015/16 financial year, in fact missing income targets by a significant margin for the first time in it’s 20 year history. No action was taken to reduce costs in year because there was no forewarning to Trustees or senior management that targets would be missed, suggesting some governance weaknesses. The result was a dangerously low level of reserves at the end of 2015/16.

However, the charity had a strong base of relationships with stakeholders and good future funding prospects. Therefore, with a new Head of Fundraising, the charity was able to recover quickly, beating income targets in the subsequent two years and restoring reserves to acceptable levels. A governance improvement programme was also implemented that has greatly improved accountability and monitoring of finances and performance, without unduly increasing the burdens on staff (albeit there remain capacity constraints)

During this period the charity has grown significantly, both in terms of overall income and the number of beneficiaries supported. Its income generation and reserves recovery plan has also diversified its income base. More robust approaches to impact assessment and reporting have also been implemented to support both accountability and income generation. This growth has enabled some investment in additional capacity and the charity is now in a more comfortable place. Through use of this tool, the charity has already identified some future risks around income generation (less certainty in future prospects) and some tension within stakeholder relationships that need to be addressed to mitigate that income uncertainty. Work is underway to address these risks to help avoid a repeat of the 2015/16 shock described above.

We hope this illustration demonstrates the value of using tools like the one we have developed. We would be pleased to work with any charity to help you use the tool or to develop a bespoke version to suit your specific circumstances. To find out more about this or any of the issues raised in this article, please contact us at julian@almondtreeconsulting.co.uk to arrange free initial telephone discussion.