More money in tough times

Wednesday, 18 February, 2009 - 09:26

The severe economic downturn means that NPO’s must make the most of fewer funding opportunities. Earning as much as before from fewer applications implies upsizing your applications. Doing what comes naturally – asking for less – gives a double whammy: too few grants to chase and too little money if granted. This article offers suggestions to help solve this persistent problem.

The severe economic downturn means that NPO’s must make the most of fewer funding opportunities. Earning as much as before from fewer applications implies upsizing your applications. Doing what comes naturally – asking for less – gives a double whammy: too few grants to chase and too little money if granted. This article offers suggestions to help solve this persistent problem.

How do severe downturns affect funding?

The number of grants will shrink, although the average size of grants is stubborn. Fundraisers can expect to see fewer applications and fewer accepted, and the smaller applications will be ignored – so make the most of those few applications that do succeed. Check your donor has budget before applying for money; some are too proud to be upfront.

Doing the math

At any moment, there are many donors are issuing grants. The grant-maker’s “market share” is the product of the number of applications, the acceptance rate and the size of the accompanying budget. In a severe downturn, expect:

Number of donors:
fewer individual and corporate donors; the number of government donors stays the same.

Number of grants: fewer new projects and causes being funded, as donors try save existing projects first. Many donors maintain old projects by rejecting new ones. If they still accept new proposals, they have protected income and/or some current projects are expiring.

Acceptance rate: dramatic rise in rejections since donors have no legal or moral duty to accept new applications.
The average size of grant: this tends to stay constant out of habit and if the donor cuts staff radically, since average grant size is related to management capacity and convenience.

What must you know?

Rushed budgets kill projects

There is one thing worse than having a good proposal rejected - having a bad one accepted! Proposal writing is unfunded, so many fundraisers normally skimp the work plans and budgets. In the rush of deadlines, with information missing, budgets are often inaccurate – and for honest organisations, too small rather than too big.

The 4 biggest reasons for under-budgeting are:
a) Forgetting the cost of head office role-players
b) Skimping / skipping activities in the workplan
c) Forgetting line-items
d) Under-estimating risks

All four have the same root – donors underpay for management and information at head office, because they prefer funding “delivery” and neglect “design”. Include a budget for designing the proposal as well as delivering the project,

What must you do?

Upsize for completeness – here are four steps to help you do this.

Step 1: Include the “indirect costs” of head office
To ensure your project budgets pay for the organisation as a whole, include the three levels of governance during the lifecycle of the project – stage 1 of decision-making pays your directors, stage 2 of project design pays your managers and stage 3 of project delivery pays your staff.

What to know?

Beware lazy accounting!

Successful projects involve three jobs – deciding, designing and delivering. Usually just the last is funded fully. Each job has its own level of the organisation. Graph 1 shows a typical governance structure: a Board of Directors leading a management team overseeing a staff body. Directors decide on projects; managers design them and staff members deliver them. All three jobs and levels have a cost and must be charged-out to donors. All too often though, fundraisers ignore director costs. Simply because directors are volunteers does not mean they are free! They also list management costs as overheads. As a result, donors pay neither. Beware accountants who distinguish between direct and indirect project costs and call the latter “overheads”. This distinction is false: even when costs are apportioned (eg projects cover the shared cost of the head office rent) they are still direct. It is easier to ask “where did the cost arise” than “what work went into the project?”

What to do?

Get all the numbers!

Ask your accountant for full absorption or activity based accounting ie match all the costs of the organisation to all of the projects by looking at the work they involve. Remember that projects go through three stages – a proposal to the board for a decision, a design in the head office or management structure by managers and delivery at sites by staff. Each involves work, time and resources and should be costed. If the organisation is committed to delivery, the costs of the projects together equal the total expenditure of the organisation.

Step 2: Include all the activities in the work plan
The project proposal has two parts: the work to accomplish the goals (the workplan) and the money it takes (the budget). The workplan shows the cost in time and the budget the cost in money. Fundraisers normally underestimate the number of activities making up the work - typically because organisations lack advice from specialist managers. If the workplan skips or skimps on activities, the budget underestimates can become severe.

What to know?

Cover all the activities

Graph 2 shows how many activities make up a standard project (10) and their normal sequence. If organisations miss managers, some activities get skipped, skimped or sunk into others – meaning the workplan underestimates the work and its cost. No matter the project, these 10 activities are unavoidable, making them the default categories for every budget. The cost for each is never zero. They are essential - forgetting a category or undercharging compromises success.

What to do?

1. Complete the work plan

Check that the activities are in the workplan and match them to costs in the budget. What are these unavoidable activities? Table 3 shows 10 of them, their management area and output.

NPO’s often skip or skimp activities if inexperienced or short-staffed. Giving all 10 to a few people overloads them and leads to work falling between the cracks. Only one or two of the activities (project and information) take place at the project site – the rest occur at the head office. Accountants who class the rest as overheads and donors who fund only project or delivery costs are cutting out 80 percent of the activities. This is why project managers feel overloaded and underpaid – they are. Too many activities that should be dealt with separately, or were ignored, fall to the project manager by default – such as risk management, information, production, facilities management etc. This also explains why NPO’s have too few managers – though the work is crucial, these activities occur at the head office and donors do not pay for it.

Table 4 lists the costs that go with the activities of each manager. The activity generates expenses when procuring inputs, producing and distributing tangible assets.

What to do? (2) Cost the activities
Check that the activities are in the workplan and match them to costs in the budget.

Step 3: Include all expenses within the 10 activities

The budget is made up of the mini-budgets for each activity in the work plan. Listing all the activities, and then all the sub-activities, ensures a complete budget.

What to know?

Each activity is a mini-project

Each activity inside a project is a mini-project in its own – so a project has at least 10 mini-projects, each with its own workplan and budget. The good news is each mini-project has the same shape as the overall project, with the same mini-activities, same workplan and same budget template.

What to do?
Draft 10 mini-plans and 10 mini-budgets budgets

This is the total set of costs for a budget – 100 in total, from 10 activities (1-10) and 10 sub-activities (A-J) in each. Each activity is its own mini-project. This matrix shows the complete set of activities and cost categories for a standard project. Don’t worry if this looks complicated, it is a simple spreadsheet that stays the same for all projects.

Step 4: Include all the risks

No project always goes to plan, especially when the proposal was conceived in haste. Neither workplan nor budget are absolutely accurate (unless contrived). Few donors accept a change in price, so the NPO must allow for uncertainty early on when little is known. Compare past budgets with actuals to arrive at the organisational trend and use the matrix below to see where risks concentrate.

What to know?

Nothing is certain

Risk is the expected cost of the work not going to plan – ie what it costs to put right. A project has 10 types of risk, one for each type of activity – so a project has at least 10 risks, each with its own probability and cost. For example, HR risks would include too few staff, or too many, not cheap enough, or too cheap. Facilities risk would be too few sites, or too many, not cheap enough, or too cheap, too far from the head office or too far from beneficiaries etc.

What to do?

Calculate the chance and cost of things going wrong

Conclusion

“In a rising tide everyone looks good, in a receding tide, you see who wasn’t wearing pants” - Warren Buffet.

In a severe economic downturn, NPO’s must make the most of fewer funding opportunities. Some were “not wearing pants” before by under-pricing their projects. They charged too little for the work of directors and managers, wrote them off as overheads, skimped or skipped core activities and underestimated the cost of risk. The “rising tide” covered the problem, but letting donors off the hook and leaving money “on the table” can be fatal now. With fewer grants available, NPO’s must right-size their budgets to survive.

Errol Goetsch has an MBA from the University of the Witwatersrand Business School and is the Director of the Centre for Social Impact, South Africa. For more information contact him on +27 84 445 7272 and errol@xe4.org or Vannessa Westcott on +27 76 112 5384 and vannessa@xe4.org

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