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Is earned income the way forward for your charity?

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Is earned income the way forward for your charity?

Julian Lomas

Silver bullet or red herring?

Over the last couple of decades there has a significant increase in the proportion of income generated by charities that is classified as "earned income", such that it now constitutes over half the total (around 52%).  

But what is earned income? Is it, as you will often hear, really a sustainable source of income?  And should your charity be looking to increase it's earned income?

What is earned income?

Earned income covers a very broad range of sources but essentially it is income generated by a charity where the funder pays for goods or services provided to them by the charity. This could individuals, government, other charities or the private sector paying for goods or services that are provided as part of the charity's mission (primary purpose) or good or services that are provided solely to generate income (non-primary purpose).  

This could include an individual buying a membership subscription that gives them significant benefits, another organisation renting a room or building, a government contract to deliver a service, corporate sponsorship or sale of branded merchandise.

Where is the growth?

The NCVO's UK Civil Society Almanac shows that the strongest growth in earned income in recent years has come from individuals buying goods or services (both primary and non-primary purpose).  Earned income from other charities and the private sector fluctuates but appears broadly flat and, after strong growth in the first decade of the 21st century, earned income from government has been falling due to austerity in public spending.

What this appears to show is that, as austerity has taken effect, more and more charities are charging for their services either directly or through membership schemes (31% of all income from individuals) and almost as many are also selling merchandise or other goods and services (e.g. fundraising events, lotteries, etc) to raise funds (21% of all income from individuals).  

Earned income appears to be here to stay but is it the silver bullet that will save your charity in an increasingly competitive funding environment?

Is earned income right for my charity?

This is a complicated question but essentially comes down to two key issues:

  1. Is there a big enough market for your goods or services to justify the additional overheads?
  2. Can you secure (and if necessary repay) any start-up funding required to get your earned income off the ground?

The first question is obviously dependent on what you plan to sell and to whom.  In my experience charities have historically not been good at assessing the market for their earned income ideas.  They often overestimate likely demand, as exemplified by numerous failed community cafes, or don't believe there is a market at all, so never take the risk.  I think there is real merit in spending a little time and/or money on getting expert advice on the market you are targeting to make sure that you have a realistic chance of generating sufficient turnover and surplus to make it worth your while.  Make sure though, that you get someone who really knows your target market.

You also need to think about the extra overheads that will be involved.  Not just the direct costs (staff, systems etc) but also the governance implications.  

For primary purpose earned income from individuals (i.e. charging beneficiaries for services you provide), you need to think carefully about the public benefit implications of your proposal. Will you be charging more than a person of modest means can afford?  If so, what provision will you make for those who can't afford the charges you propose?  Would it be better to provide these services through a trading subsidiary either because of the public benefit implications or to protect the charity from risk?

For non-primary purpose earned income of any appreciable scale, you will almost certainly need to set up a trading subsidiary to ensure you don't fall foul of tax rules or charity law requirements.  Depending on the scale and complexity of your proposals you may need expert governance, tax and/or accountancy advice.

The second question depends on how you will enter your target market. Can you make a soft entry and gradually grow your infrastructure and delivery capacity as turnover increases? Or do you need a big launch to generate significant market share and turnover quickly to cover a step change in running costs? if the latter, how will you fund the initial investment (which must be made at risk)? Can you justify using your reserves, can you get a grant or will you need a loan?

No matter how much start up funding you need or where it will come from, you need to have a sound business plan/case, based on a realistic assessment of the market, backed by a robust risk assessment. Your trustees should not put the charity's assets at risk without sound evidence that your proposal can succeed. This is also something you should ask your market expert to help you put together; they will understand the risks in their market better than anyone.

Is it really sustainable income?

The short answer is it depends on your target market. If you intend to earn income from government contracts (or subcontracts from the voluntary or private sector), then those will almost certainly have to be re-tendered every 3-5 years, and there are always risks of cuts to contract values arising from further cuts in public spending. In my view, any income source that is ultimately backed by public money should not be considered to be a long term sustainable source of income, particularly not if demand for the service in question is rising but funding is likely to be cut again in future.

Earned income from more "retail" type sources, such as charging individuals or other organisations for good or services that you provide directly to them, is more likely to be a sustainable source of income providing that you can secure sufficient market share and margins are high enough that surpluses will contribute significantly to your core costs. But beware market disrupters; you don't want to go the same way as Nokia or the CD! One way to guard against such shocks is to make sure you have people running your earned income services who have a more commercial, sales outlook (while remaining true to your charity's core values), but there are no guarantees.

My conclusion, therefore, is that all charities should be thinking about growing earned income as a proportion of total income but that they should take care to think through the options and risks before going ahead with any particular idea. Earned income is not a silver bullet, nor is it right for all charities. Nor is it a red herring; the growth in earned income in the last 20 years clearly shows that it is a legitimate and valuable income source for the sector.

If you would like to discuss further anything from this short introduction to earned income in the charity sectors please do contact us at julian@almondtreeconsulting.co.uk. We would be delighted to hear from you.