- The CMDS - a registered practice with the South African Institute of Chartered Accountants which acts as accounting officers for organisations that choose not to have an independent audit - believes that 2014 is a year for leaders of nonprofit organisations (NPO) to become more financially alert and astute and so be more aware of financial dangers and pitfalls as well as new opportunities for broadening income streams and building financial sustainability.
In these unpredictable times in the sector, it is only the organisations that have implemented good strategies for financial sustainability that will successfully ride the storms ahead. Consequently, CMDS plans to, once again, offer workshops on financial sustainability in 2014. In addition to the usual one-day workshop introducing strategies for financial sustainability, CDMS is planning an advanced workshop at which it will focus particularly on possible ‘business models’ for NPOs that focus on income generation through the provision of services, trading and investment. This workshop will consider some of the dangers and pitfalls associated with such models, as well as the opportunities.
The CDMS will also try to ensure that NPOs are updated, through its news and the website, with the constantly changing issues related to employees' tax and the South African Revenue Services (SARS). The Employment Tax Incentive Act is one recent development which presents some opportunities for NPOs (as employers). CMDS also plans to offer information sessions related to payroll and to some of the dangers and pitfalls relating to SARS and the law. The failure to pay over Pay As You Earn (PAYE) and other taxes to SARS results in steep penalties and interest and has already caused many organisations to close its doors. Be aware, be astute - pay SARS first!
Another issue that has tripped up some organisations has been their extensive use of cash to make payments (because they thought the use of large amounts of cash was unavoidable or enabled them to save money). The dangers and pitfalls of using cash to make payments are significant so CMDS intends, in the second half of the year, to offer its one day workshop on this topic, entitled ‘Cash and Accountability’. In dealing with cash, as with all areas of financial management, there is a cost to implementing effective control - financially astute NPO leaders need to weigh up this cost against the risks and benefits of increased control.
Aside from these open, ‘public’ workshops, CMDS is also available to facilitate and run workshops specifically to any organisation or a group of organisations - some topics that have proved particularly popular with, and helpful for, NPOs include:
- Financial management for project managers;
- Risk assessment and management for NPO boards;
- Activity-based budgeting;
- Effective cash flow management; and
- Understanding NPO financial reports.
The open training schedule for 2014 will be finalised and available by the end of January, giving NPOs the opportunity to consider which areas of capacity development could benefit them.
We wish you every success in 2014.
For more information, email: email@example.com.
For more about the CMDS, refer to www.cmds.org.za.
- A well-managed reserve fund is a vital component of any organisation’s sustainability strategy. Reserves provide a safety net to carry organisations through the lean times but they also, crucially, offer the breathing space to enable meaningful collaboration, planning and growth so that organisations deliver the best, most transformative solutions to South Africa’s challenges.
Alan Wellburn from Citadel Wealth Management explains.
Public benefit organisations have a duty to be responsible stewards of public funding and trust – this means managing their finances wisely.
A reserve is the balance of the previous years’ operating surplus - or unspent funds. Some organisations set aside a specific percentage of their operating costs for a reserve each month or year.
The benefits of a reserve include:
- Protecting beneficiaries by making sure they receive services provided by the organisation, regardless of changes in funding cycles or funding delays;
- Providing funders with assurance that the organisation has the capacity and financial health to make the best use of grants;
- Creating a safety net to protect the organisation in unforeseen circumstances, such as a major funder pulling out suddenly;
- Providing capital that can be used for future projects (e.g. building maintenance), borrowed against or used for the expansion of the organisation’s activities.
Myth: Having a reserve discourages funders because they think the organisation has enough funding and is not as needy.
Reality: Most major funders today prioritise the sustainability and impact of the organisations they support and prefer grantees to have a reserve. Many specifically look for organisations that have enough in reserve to cover at least three to six months’ operating costs.
Sources of Funding
Building up a reserve can be a challenge, particularly in tough economic times. Some funders would rather support beneficiaries directly than contribute to a reserve fund.
But there are other ways to build a reserve:
Operate at a small surplus each year and invest any of the surplus, rather than spend it in the following year. Although this requires a level of financial discipline, it is a strategy that pays dividends in the future.
Unrestricted funding such as legacies, bequests, individual giving and self-generated income are also good sources of funds for a reserve.
Investment income (interest or dividends) generated by investing larger grants until the funds are needed for project implementation is also a great source of reserve funding.
Myth: It is more responsible to keep funds in the bank, rather than to risk it in an investment vehicle.
Reality: Funding not being used for immediate operating expenses that is kept in a bank account is losing value over time because the interest rate does not keep up with inflation - this is called inflationary risk. But investing in the stock market can also be a risk because value can fluctuate rapidly in the short term (volatility risk). An experienced investment house will be able to select an investment strategy that takes into account both of these risks so that surplus funds will grow over time and stay ahead of inflation.
Investing Reserve Funds
The directors or trustees of public benefit organisations have a fiduciary responsibility to ensure that reserves are invested wisely. An investment approach which takes into account both inflationary risk and volatility risk is essential. The examples below show how investment decisions can make a major difference to the size of a reserve over time.
Two organisations have R10 million in reserves and choose to invest it differently.
In the Bank:
Organisation A chooses an interest-bearing bank account. The interest on the R10 million (four percent) in an inflationary environment like South Africa, is less than inflation at six percent. After 25 years, this reserve is only worth R6m in real terms. In other words, the purchasing power of the R10m reserve will be eroded by inflation and will be reduced to R6m, despite the interest earned.
Modelling assumptions: Inflation rate: six percent; Interest rate at bank: four percent
Organisation B chooses a diversified, prudent investment portfolio. The return over a 25 year period is more, at nine percent, than the inflation rate of six percent. Based on a projection rate of three percent in excess of inflation, the value of their R10m reserve increases to R20m in real terms.
Modelling assumptions: Inflation rate: six percent; Projection rate: three percent in excess of inflation (nine percent nominal)
Managing a Reserve
It is important to get advice from a reputable wealth management company with the knowledge and expertise to implement the best investment solution for an organisation.
Cash-flow modelling is used to make sure an organisation has access to its capital if needed (short-term liquidity) as well as long-term growth (to stay ahead of inflation). Knowing what cash will be needed and when, the two major portfolio risks of inflation and volatility can be managed over time.
This is achieved by allocating the reserve fund to three broad risk categories or portfolios:
The Stable Portfolio - This is the part of the organisation’s portfolio where short-term funding needs will be drawn from. This portfolio is often made up of Money Market Unit Trust Funds as they are liquid and their value is stable; and is toped up from the best performing assets in the Prudent and Growth portfolios.
The Prudent Portfolio - This portion of the portfolio is the reserve fund safety net. Market movements and fluctuations have little effect on this type of portfolio. Should the long term growth portfolio decrease suddenly, this portfolio would allow enough time for a recovery before having to use funds from the Growth portfolio for the organisation’s operational needs.
The Long Term Growth Portfolio - This is invested for growth to make sure the reserve fund beats inflation over the long-term. This part of the portfolio is usually the most volatile but because it is invested over the long-term, this does not present a problem.
The next step is to allocate specific amounts to the underlying funds within each of these investment categories.
Whilst offshore diversification (investing some of the funds outside of South Africa) can have a very positive effect on a portfolio, the fluctuating value of the Rand (currency volatility) can have a significant effect on returns. Reducing currency risk through hedging, a technique to guard against foreign exchange fluctuations is a way that Wealth Managers manage this risk.
An endowment is an established pool of assets (for example rented property, cash, shares, bonds) used to generate income to fund the operations of an organisation. This reduces the organisation’s dependency on donors.
Endowments are often established by bequests or restricted donations. In some circumstances, the donor will make a large grant and stipulate that it be invested, with the principal to remain intact in perpetuity or for a defined time period. The organisation can use the interest or dividends from the endowment to fund their operating costs while also keeping the original grant. This allows for the donation to have an impact over a longer period of time than if it were spent all at once.
Reserves can be used to create endowments. Once a reserve has been built to the required level, all income earned in excess of the reserve requirement and returns on investments in excess of inflation can be used to build an endowment.
Just like investing a reserve, it is important to get advice from a reputable wealth management company who has the capacity to choose the right investment solution for an endowment. Given the long-term nature, size and income-generating requirement of a typical endowment, the optimal investment solution can sometimes be more complex than that of a reserve.
Fees and Costs
All this wealth management expertise does not come for free and different investment solutions will have different costs and fees. Some wealth management businesses apply a fee based remuneration model for advisory, administration and fund management services, while others charge commission (a percentage of the funds under management). Registered public benefit organisations are sometimes offered discounted fees because of the charitable nature of their work.
All registered financial service providers are required by law to disclose all of these fees in a clear and understandable way. This means that an organisation can compare fees and be clear about what the investment will cost them.
Whether you are a new organisation just starting out or a large organisation with an established endowment, your Reserve and Endowment policy should be regularly revisited to make sure you are making the most of the funds you have. The investment solution you choose must be aligned with this policy and based on sound financial advice. This will ensure that these funds are optimally invested while minimising the organisation’s exposure to unnecessary risk.
To find out more about investing your reserve, contact: Citadel Wealth Management.
- There are many risks that confront nonprofit organisations today and some arise where an organisation has a phase of rapid growth in resources. We have noted this, particularly in relation to new ‘social movements’, with activism at their core, which have been achieving significant success in raising public awareness and in raising funds.
Charles Tilly defines social movements as ‘a series of contentious performances, displays and campaigns by which ordinary people make collective claims on others.’
A number of such movements have received substantial initial funding leading to rapid growth, others are still growing or are poised to grow.
With growth comes both increased numbers of paid staff (employees), who are often deployed over a wide geographical area, and increased levels of activities. Together, these areas of growth result in an increased need for effective financial management systems and controls and for an organisational infrastructure that few can afford, or are prepared to pay for.
As budgets get bigger (due to increased monthly financial commitments), the need for good financial management increases but the associated costs become more difficult to finance, especially if the initial funders later withdraw or reduce their support. We are now seeing large, previously well-funded and effective organisations using up their hard-earned reserves (built up over many years) in order to meet their on-going obligations to pay staff and other running costs. What is happening?
With some exceptions, we are seeing funding shift away from established organisations, some of the funding is then switched to emerging social movements and related organisations which are seen to offer a new dynamism, mobility, profile and exposure at a lower cost than the more established organisations with a longer track record. Whatever your views are on whether this is a wise move on the part of funders / donors and on whether such funding will be for the longer-term, our experience tells us that, if you do not invest in the very necessary costs of systems, controls and infrastructure or the lack of them will come back to bite you!
Lack of effective financial management systems, controls and infrastructure may result in one or more of the following:
- Inability to account for, and report back to funders and supporters on, funds received;
- Disgruntled staff, funders and other stakeholders;
- Waste and/or misappropriation of resources (including, but not limited to, cash);
- Damaged reputation;
- An inability to carry out necessary financial planning and strategic financial thinking;
- Cash flow crises.
Financial management expertise
Failure to set up appropriate financial management systems from the beginning is a big mistake and a patch-up job later, when the gaps and negative consequences are already obvious, may prove to be more expensive than the implementation of good systems from the start would have been. At a later stage, it will also become even more difficult to secure funding to implement / upgrade systems. Every organisation (regardless of size and track record) needs access to financial management expertise. Good finance administrators, bookkeepers, accountants and financial managers are in short supply and are expensive to employ, but all organisations need the skills they offer. This is not an expense to hold back on and it is wise to:
- Employ or contract experienced and well trained finance staff or service providers from the outset; and
- Ensure the finance staff are given adequate support and training in line with their responsibilities.
- This article first appeared on the CDMS Website.
The African Development Bank (AfDB) says the International Monetary Fund's (IMF) supervised economic reform is indicative of the significant improvement in Zimbabwe's cooperation on economic policies and its commitment to address its arrear problems.
The bank points out that the, "Implementation of the Staff Monitored Programme (SMP) should help establish a track record of sound policies and is an important stepping-stone towards arrears clearance and an IMF-supported debt relief programme."
It further states that debt relief should help free resources from debt service to support the underfunded public sector investment programme.
To read the article titled, “AFDB commends Zim's debt clearance plan,” click here.Source:All Africa
- More and more we are starting to read in the news of nonprofit organisations going into liquidation and closing down. CMDS is often called on to assist organisations that are already in financial crisis for reasons such as:
- Inability to get a tax clearance certificate needed to secure funding;
- A dispute of one kind or another;
- Suspicion of fraud or theft;
- An unexpected but significant financial obligation to report or pay; and
- Threat of closure due to lack of funds.
So what are some of the first signs of financial trouble for an NPO?
You might think that cash flow difficulties, particularly an inability to pay costs such as salaries, rent, and other running costs, would the first sign of trouble. However, it is our experience that cash flow difficulties today are the result of trouble that started much earlier and should have been picked up and addressed.
Trouble may be brewing at your organisation that you may not be aware if:
- Financial recordkeeping is not up to date - it is not uncommon for us to find that either no transaction capturing is being done at all or that capturing is months behind. The records of your organisation should be captured into an accounting package (such as Pastel or Quickbooks) and reconciled to bank statements to the end of the previous month by the middle of the next month. You do not even need to wait for the auditors to finalise the previous year’s records and reports to start capturing and checking the next financial years’ records;
- Financial reports are not presented to, or not considered regularly by, the management (monthly) or the board (quarterly);
- Financial reports are inaccurate or incomplete or do not agree to the underlying accounting records. Often, such reports are presented on Microsoft Excel spreadsheets with no reconciliation to actual balances in the bank accounts, in such cases, the information cannot be relied upon for good decision-making.
- The situation revealed by the financial reports is not fully understood or is simply ignored, appropriate questions are not asked and actions are not taken even when complete and accurate financial reports are presented and considered;
- Monthly cash flow forecasts are not prepared and scrutinised, starting with the balance in the bank today and realistically forecasting the expected cash inflows and outflows month by month showing the resulting closing balance of funds per month for the year ahead; and
- There is a lack of independent regular checking of the work of the finance person, who is often trusted to carry out all the necessary financial and legal obligations of the organisation unsupervised, including meeting the South African Revenue Services (SARS) requirements. This leaves the organisation vulnerable to the effects of normal human frailties, such as forgetfulness, omissions, errors or even fraud. Financial records and systems need to be regularly independently checked – not just by the auditor once a year so that the finance person can be held accountable.
- Ongoing deficits - expenditure is consistently higher than income (or put another way the regular income is not enough to pay for regular expenditure) in general or for particular projects;
- Liquidity problems – cash in the bank today is not enough to pay the outstanding debt already owed today – so putting off paying what is due today until some money comes into the bank.
- Delaying payment of salaries to staff or payments to SARS for employees tax and UIF.
- Letters of demand for payment from suppliers, contractors etc.;
- Using earmarked grants and donations when received into the bank account to immediately pay outstanding debts;
- Taking loans – either personally or from others;
- Depleting reserves or savings – needing to draw down on savings and to cash in or sell investments or other assets to meet ongoing expenditure commitments;
- Borrowing from Peter to pay Paul – using money received for one purpose to pay for expenditure for another purpose often with the intention to repay when ‘other money’ is received. However, the “other money” gets less and less and finally dries up completely leaving you unable to replace the borrowed money and unable to report honestly on the spending; and
- Falsifying reports to funders to cover up the mess and get funds released.
What to do? Make sure that the organisation’s financial systems are sufficient and are operating effectively and that you are constantly aware of your organisation’s actual and accurate financial situation – be wise and take action earlier rather than later.
- CMDS is available to assist, advise and support your organisation. For more about the CMDS, refer to www.cmds.org.za.
The Minister of Trade and Industry, Rob Davies, says Cabinet has approved the Lotteries Act Amendment Bill, which is aimed at reforming the lottery system.
Davies pointed out that the Bill is aimed at dealing with challenges such as the strict requirements for non-governmental organisations, poor relationship between the National Lotteries Board and the beneficiaries, and the delay in the distribution of funds, among other things.
He noted that the Bill proposes the appointment of full-time staff at the distribution agencies, since the current staff is working on part-time basis. He further said that staff at distributing agencies will only be appointed based on their skills and competencies and that those appointed will be forced to relinquish their interests in organisations that apply for Lotto funding.
The Bill will also ensure that the requirements for financial statements are in line with the Companies Act, which calls for stronger reporting on how the grants are utilised. In addition, Davies reiterated that 80 percent of the budget should reach the beneficiaries.
For more about the National Lotteries Board, refer to www.nlb.org.za/general-public.html.Source:SANGONeT
Many charities do not realise or understand the benefits of being registered as a public benefit organisation (PBO), Hoosen Agjee explains.
In our many years working with the nonprofit sector (NPO) sector, we have identified that a significant number of organisations are still unaware of the specific tax benefits available to them,’ says Hoosen Agjee, managing director of Turning Point Consultants (TPC) and author ofTax Benefits for the Nonprofit Sectorand A Guide to the New Companies Act and Nonprofit Organisations.
In fact, he adds, “There’s a common misconception that an exemption from Income Tax and certain rates are perhaps the only benefits available to the sector’. Agjee says that, “All is not lost for NPOs who haven’t been tax efficient in the past.” TPC has designed a system tailored specifically for such organisations, measuring the quantitative impact of such inefficiencies, and more importantly focusing on practical solutions to remedy this. With many organisations experiencing significant reductions in donor funding, these savings and recoveries have also opened up an additional recurring income stream for NPOs.
When Agjee published his first book,Tax Benefits for the Non Profit Sector, in August 2002, the general comments received from NPOs included:
- What has tax got to do with NPOs?
- As an NPO we are exempt from taxes – we don’t pay taxes;
- We have an NPO number therefore we can access all the tax-benefits; and
- As we are a Section 21 company, we can issue our donors tax deductible certificates.
What is a Nonprofit Organisation (NPO)?
An NPO is any entity (whether formally registered or not) which carries out activities in a nonprofit manner.This means that any surplus or gains that the NPO makes will not be distributed to any individual, member or trustee of the organisation but shall be for the benefit of such organisation. NPO activities could relate to social, religious, educational, welfare and the list goes on. The fundamental requirement is that the NPO should not promote the economic interest of any individual or employee. Therefore, most or all organisations may be regarded as NPOs if they meet these criteria.
What are the benefits of an NPO number?
The NPO Act regulates NPOs in South Africa. Once an NPO meets the requirements of the NPO Act, it may apply to the Department of Social Development and on qualification, the organisation will be issued with an NPO number which results in the following benefits:
- Public recognition;
- Promotes good standing;
- Transparency and accountability in activities; and
- Promotes access to government and corporate funding.
Unlocking tax benefits
Our government, recognising that NPOs play a significant role in society, has designed specific tax benefits and exemptions to assist NPOs in meeting their objectives. Their principal aim is to ensure monies that are required to provide goods and services, which are generally for the benefit of the poor and needy, are not trapped as a tax cost.
Obtaining a tax exemption
The Income Tax Act defines the types of activities that an NPO can undertake before it is granted a tax-exempt status. Inaddition, the NPOs’ founding documents must comply with the requirements of the Act. NPOs that meet these requirements can take advantage of the tax benefits to reduce their tax burden and obtain other benefits. Obtaining a Tax exemption is not automatic. An application must be made to the South African Revenue Service (SARS) who, on review, will grant the NPO a tax exemption status. Once tax exemption is approved by SARS, the NPO obtains a Public Benefit Organisation (PBO) status.
Who can access tax benefits?
To access the tax and other benefits, the NPO has to be classified as a PBO and must undertake PublicBenefit Activities (PBAs).
What is a PBO?
A PBO is any welfare, religious or cultural body, private school, bursary fund, charitable body, charitable trust or sporting body approved by SARS. The PBO can be structured either as a nonprofit company (commonly known as a section 21 company), a trust or an association of persons.
What are Public Benefit Activities (PBAs)?
SARS has defined different fields of activities that a PBO can undertake for it to qualify for tax exemption. These activities are known as PBAs and are classified under:
- Welfare and humanitarian;
- Religion, belief or philosophy;
- Health care;
- Education and development;
- Land and housing;
- Conservation, environment and animal welfare;
- Research and consumer rights;
- Sport; and
- Provision of funds to other PBOs
Donors also benefit when donating to a PBO compared to any other organisation.By donating to a tax-exempt PBO, the donor may achieve, among others, the following tax benefits:
- 20 percent donations tax;
- 20 percent estate duty; and
- 10-14 percent capital gains tax.
Claiming tax deductions from SARS
Where donors have made donations to those PBO’s limited to conducting PBA’s under the following categories:
- Welfare and humanitarian;
- Education and development;
- Land and housing;
- Conservation; and
- Environment and animal welfare.
Who can claim and how much canbe claimed?
All donors - including salaried employee, a company or close corporation - can claim this deduction from SARS. The claim is however limited to 10 percent of the donor’s taxable income. The donation can be in the form of cash or in-kind (e.g. a supermarket may donate groceries and still qualify for this tax benefit).
Donors prefer tax–exempt charities
There are thousands of NPOs all competing to get their share of donor funding. A tax-exempt PBO stands a better chance of getting donor funding than one that doesn’t have this status. Tax exemption is a win-win situation for both donor and recipient because:
- The donor gets the satisfaction that, where an organisation is tax-exempt, every cent of the donation reaches the targeted beneficiary instead of it being earmarked for taxes and duties;
- The organisation’s expenditure is reduced by the tax saved and it can use the savings for its activities; and
- The donor achieves income tax benefits on donations made to section 18A PBOs.
Turning Point Consultants (TPC) began as a consultancy practice established more than 25 years ago. As a multi-disciplinary firm, TPC offers a comprehensive and seamless tax recovery and related consultancy service tailored specifically to meet clients’ needs while delivering value added benefits for the NPO sector.
- Hoosen Agjee is director at Turning Point Consultants. This article first appeared in the Downes Murray International’s Fundraising Forum electronic newsletter. He can be contacted on 083 282 8786 or 031 208 2458 or e-mailed to firstname.lastname@example.org.
This is Part 2 of a two-part series of articles to assist NGOs in the transition towards greater autonomy. We explore some actions that can assist with transition to a more businesslike approach, and also take a closer look at income generation and its viability in the non-profit context.
Think Like a Business
Let’s start by looking at four important ‘re-thinking’ strategies that help an NGO make the transformation to greater success:
1. What is the trade? Understanding the ‘fair value exchange’
A key ‘aha moment’ in the transformation of an NGO is the recognition of the value that NGOs offer to funders.
In a traditional business environment, the value exchange is easy to spot as goods and services are exchanged for money. Key to this successful relationship is a win-win for both parties in the form of a balanced or fair value exchange. In a nonprofit context, it can be more difficult to recognise what is being exchanged and to know when this is equal or fair.
The starting point therefore is to recognise what we are exchanging. What exactly is the trade?
Generally NGOs provide a service making a difference and uplifting communities in areas of need. Funders want the same end results, but can’t achieve this without NGOs and effectively pay them to deliver the results they wish to see. The NGO becomes the service-provider of social change.
As an example, an NGO providing HIV counselling in impoverished areas is delivering on their mandate to develop healthy communities. For a corporate social investment (CSI) manager whose mandate is to make a difference in communities in this way, you are a Godsend! You are the implementing agent of their vision, and your service delivers the outcomes that they seek. In this case the fair value exchange is community empowerment in exchange for money (funding) – and remember that the more visible, tangible and measurable this outcome is, the more readily it can be valued by the funder.
2. Who is the client? Using client-centred thinking
Most NGOs view their beneficiaries as their client and are totally focussed on providing added-value goods and services (usually for free) to the people, community or cause that they serve. The business-like approach sees things differently.
In business terms, a client is someone who pays for goods and services. As radical as it may seem to some, this means that the NGOs’ client is actually the funder, not the beneficiary, and it is this paying client that enables the services of the NGO to be delivered. Of course a sincere commitment to the servicing of this beneficiary community is at the authentic core of any reputable NGO, so we are not suggesting a diluting of this commitment, but rather recognition of the role of the primary funder client, without whom the NGO will simply cease to exist.
Recognise who your real clients are, and look after them like gold!
3. Costing and pricing – who pays the overheads?
A common challenge in the nonprofit sector is that many funders shy away from covering running costs and overheads, and are especially prickly about salaries. This is understandable from the funder perspective, as they are reluctant to fund a lavish, lax or unproductive organisation and because it is nearly impossible to quantify impact from supporting the running costs and salaries of a service-provider organisation, nonprofit or otherwise.
Now we are in no way suggesting that all NGOs are lavish, lax or unproductive, but it is the responsibility of the NGO to prove this and to motivate these costs as part of an effective, productive unit.
The reality is that any organisation must recoup its running costs to survive. In costing terminology this is known as overhead contribution or overhead recovery, and it is generally added to the price as a percentage of direct costs (raw materials and direct labour). Typical overhead contributions can range from 15 – 40 percent, depending on the size of the organisation and the overhead structure. What this means is that to be sustainable, your organisation should be building into the budget a contribution towards overheads; it can be in the form of project managers’ fees, administrative costs etc, all perfectly legitimate and justified as long as they are project-specific and not inflated or unreasonable.
Know that overheads exist and are a legitimate part of the operational costs of all organisations, and find ways to make them palatable to your funding client!
4. Return on investment – understanding the terminology
We spoke in the first instalment about Return on Investment. In business terms, this simply means getting something back for what you put in, usually in the form of profits or other strategic advantage. In the CSI and development context, this includes the beneficial outcomes that result from investment in a project, community or social initiative. Sometimes called ‘Return on Social Investment’ this return can be measured in social terminology such as people supported, CO2 reduced, children educated, rather than in pure monetary measures.
Secondary returns can also be very important, and benefits such as positive media and public relations opportunities, the chance to form strategic partnerships with government and other stakeholders and the generation of goodwill and brand loyalty can be a very valuable return on investment for funding clients.
The nonprofit that understands the concept of return on investment and its importance to corporate clients especially, will have a better chance of developing long-term funder relationships.
If You Do It, Do it Properly
While many nonprofit and related organisations run income-generating initiatives, success stories are few and often use outside expertise (advisory Board, mentors, consultants etc) to guide growth. The reasons for this are varied but a common denominator is a lack of singular purpose – many non-profits start income generation programmes as an add-on to their core activities (whether HIV support, social services, advocacy, feeding schemes etc) and thus find it difficult to commit the full and necessary resources that the initiative needs to be self-sustainable. This is in contrast to a typical business, where sharp focus is needed if one is to succeed.
We recently received an e-mail from an NGO colleague asking for assistance with the product development of handbags made from recycled newspaper. The intention was to capacitate a group of unemployed women to make the handbags to generate income for themselves, and some commission for the NGO itself. Their plan was to build up some stock and then look for potential markets.
This is sadly a very typical scenario in NGOs across South Africa – whereby an income generation project is started with excellent intentions but little planning. Our response to her was as follows:
- The starting point for any income generation initiative (like any business) is finding a viable market. Who, where, when, how and at what price would be typical questions to ask. (the market-led strategy);
- Once the market is better defined the next step is finding or developing a suitable product for that market, bearing in mind the competition, variances in taste, quality, design and trends (market-led product development);
- This should be followed by developing the appropriate business infrastructure, and the necessary basic systems and methods to run the business operation, including HR, sales, marketing, admin, financial etc;
- Only after these steps are complete should we venture into training producers to produce, refining the product to ensure that it is manufactured and supplied at a sustainable margin, and making up some samples or stock.
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- Catherine Wijnberg is director and Anton Ressel development practitioner at Fetola & Associates.
It is clear from several articles of recent weeks that the prospect of having to generate income in-house to fund the provision of critical, socially beneficial services is causing deep concern for many NGOs. Similarly, the expectation that nonprofits be run along business lines is being greeted with protest and accusations of unrealistic expectations. Yet, the reality is that in a changing competitive world, those who adjust to the needs and expectations of the customer (in this case the funder) are those who survive and thrive. The first challenge for the sector is to better understand these changing expectations and their impact on individual NGOs, and secondly to find ways to move towards this new reality while maintaining organisational integrity.
This transition to ‘sustainability’ is largely being viewed by NGOs as the creation of additional self-generated income to supplement funding and grants. In truth, with few exceptions income-generation is not something that nonprofits do very well, which is understandable given their non-commercial origins in social support. NGO systems are seldom set up for profit-making applications, some struggle with the concept of charging for services that they would prefer to offer for free, and when it comes to products the end result is often under-cooked and geared to available skill levels, rather than to market needs or wants. In most cases, income generation projects are primarily established to provide beneficiaries (such as mothers with HIV/AIDS or child-headed households) with the means to earn a bit of income to help them survive, rather than as a means of income for the NGO itself.
However, sustainability runs deeper than income generation alone and we would argue that there is merit in a more business-like approach in the nonprofit sector, for all stakeholders. The truth is that the NGO space is competitive, with ever-increasing numbers of nonprofit organisations competing for a slice of the diminishing pie. More and more of donors and funders are choosing to support projects and organisations that can offer them a return on their investment, not necessarily in financial terms but certainly in terms of measured and visible impact, positive public relations and the opportunity for project growth, replication and sustainability.
Development and corporate social investment (CSI) fund managers are almost without exception over-worked and under-resourced, and face daily with dozens if not hundreds of applications that they need to fit to a finite budget. Their challenge is to decide who to support for the best possible outcomes, and the task is often heart-breaking as they are forced to decline appeal after appeal. Thus a major responsibility for the nonprofit fundraiser is to make their application stand out from the crowd!
Clearly, the organisation that has a powerful, concise proposal that says what they do, how they do it and what benefit the funding will generate, coupled with meticulous financial records, a professional and appropriate corporate identity and excellent communication tools (website, e-mail, landline, mobile etc) will appear most attractive. Compare this with the established but disorganised NPO that has a decades-old website, poor communications, a long-winded and vague proposal and very little to offer apart from the needs of their beneficiaries or community.
Just as commercial businesses sell products or services, in a competitive world so too must NGOs increasingly be equipped to ‘sell’ their offering to prospective donors and stakeholders. Simply having a worthy cause and doing good and necessary work is no longer sufficient to secure donor support. NGOs need to market themselves as the best organisation to deliver long-term value from the social investment that funders are making.
In the above context, increased self-sustainability and a business-like approach does not mean that a nonprofit must generate its own income by selling products or services to fund the good work it is doing. It is primarily about adopting a more professional, measured and holistic operating philosophy, one that recognises that increased competition for funding requires one to stand out from the crowd in order to flourish. For many these changes will involve introspection, and possibly even require the support of specialist consultants who can assist with the transition to a more professional structure, together with better reporting tools and business systems and a more attractive overall proposition for potential funders.
There are some programmes that support NGOs in transition, such as the Old Mutual-funded, Legends Business Development Programme. This programme welcomes NGOs and nonprofits who fulfil programme selection criteria and have a desire to grow, strengthen and improve their overall offering. The most successful NGOs attract ongoing donor support in the millions, and without exception these organisations have good systems, excellent reporting, a brand that they nurture and promote, a concise and clear mandate, vision and mission, and a recognition that the needs of their target beneficiaries are no longer enough to get funders excited and interested in their work – they have to look at the needs of the funder as well.
Programmes such as Legends assist NGOs that want to transition to becoming effective and efficient long-term players in the social and economic transformation of South Africa.
The call to NGOs for transition to social entrepreneurship and self-sustainability is really a call for greater shared responsibility – an approach that tips the balance of power in favour of the NGO that understands they are the master of their destiny rather than a victim of circumstance. This requires leaders to look beyond simply the delivering of services to beneficiaries, but to understanding and embracing the 360 degree needs of clients and funders too. With a little help and focus, all organisations can develop beyond ‘the way things are done around here’ to this new dimension of possibility, and a sustainable future.
- Catherine Wijnber is director and Anton Ressel development practitioner at Fetola & Associates. This is part one of a two-part series of articles to assist NGOs in the transition towards greater autonomy. In Part 2, we will explore some actions that can assist with transition to a more businesslike approach, and also take a closer look at income generation and its viability in the non-profit context.
- A recent series of workshops highlighted a growing trend in the NGO and community-based organisation sectors – more than ever, nonprofits need to make profits too.
With corporate social investment (CSI) budgets tightening and the NGO sector oversubscribed and under-funded, nonprofit organisations that successfully integrate their social and income generating activities and operate along business lines are increasingly showing the way forward. More and more, such hybrid organisations are providing potential funders with a far more attractive option than traditional not-for-profit models.
Changing Funding Landscape
It is no secret that one of the first budgets to be slashed when things are tight is CSI spend and other ‘non-essential’ areas not directly linked to the bottom line. The outcome of this has been a reduction in funding spend, cancellation of funding support to organisations that have not performed as well as expected and a far more circumspect approach when considering new funding applications – like most areas of business, funding has become about cost versus return.
In practical terms this means that nonprofit organisations that show eagerness and desire to generate their own income, and have developed plans to make this a reality, are being viewed as more attractive ‘investments’ for corporate and other funders. Dr Pandalani Mathoma, acting head of the Old Mutual Foundation, echoes this approach. “Our agenda with enterprise development is to equip people with the skills to determine their own futures, not to create more dependency. We support sustainable programmes because we recognise that what is good for our country is good for our business – economically empowered communities are the future for South Africa and the future for Old Mutual.”
Vision and Strategy Workshops
The need for nonprofit organisations to become more business-like emerged strongly at a recent series of vision and strategy workshops rolled out as part of the Old Mutual Legends business development programme. The two-day workshops were attended by almost 100 organisations in Cape Town, Durban and Johannesburg respectively during March and April, including small businesses, NGOs, community-based projects and emerging entrepreneurs from every province in South Africa.
The intention of the workshops was to assist both nonprofit and for profit businesses to streamline their vision, goals and strategic objectives, and also to allow the Legends team to finalise their selection of businesses for the 2011 programme. Legends has been running since 2007 and provides an interactive support platform for businesses in the craft, tourism, services and small-scale manufacturing sectors.
The Business of Business
“What we are seeing more and more, is that many nonprofit organisations can no longer sustain themselves on funding alone, especially those that are focused on job creation, skills training and education. They have to learn how to supplement their funding with income-generating activities in order to deliver on their mandates effectively. This means operating along the lines of more mainstream businesses, developing an entrepreneurial mindset with a focus on productivity and cost versus return ratios,” says Catherine Wijnberg, MD of enterprise development agency Fetola.
In practical terms, this presents a significant challenge for many nonprofit organisations. A social or developmental mindset is quite often at odds with a more mainstream, profit-driven approach, and many leaders of NGOs and nonprofits are themselves not business people but rather social activists or community leaders. So how does one balance the need for profit-thinking with a mandate that may include employing people with disabilities, training school leavers with no income, or providing job opportunities to HIV-positive mothers who need to work from home to look after their families?
“We are of the opinion that success starts with what we call ‘the Business of Business’”, explains Wijnberg. “We believe that there are certain fundamentals that need to be in place irrespective of your particular business model or legal structure. This includes things like a strong vision, an effective strategic plan, systems that allow for growth and access to necessary resources. A nonprofit needs these elements just as much, if not more than a for-profit business, and yet it is alarming how many of them do not prioritise these business fundamentals until it is too late.”
Themba Mkhize, managing director of the KwaZulu-Natal Society for the Blind, attended the Legends workshop and found himself looking at his nonprofit in whole new way. “This workshop really challenged my thinking and how we will operate our society going forward,” he says. For Themba, the realisation that not only is his organisation selling the products made by the blind weavers and craftsmen who work under its umbrella, but that its funding model is also a product that needs to be ‘sold’ to potential investors and funders, was liberating.
It is increasingly apparent that for nonprofit organisations to survive and thrive in the current economic climate, they need to see themselves as a business, albeit one with a higher purpose than just the pursuit of profits, and communicate their value-add to potential funders and investors.
The days of funders throwing money at a cause have passed, especially here in South Africa where it seems like every second organisation is trying to ‘save the world’. Like most successful businesses out there, nonprofits need to ask three key questions of themselves – Who are my clients? What are their core needs? How can I satisfy those needs?
The rest, frankly, is increasingly being viewed as bells and whistles.
For more information on this topic, refer to www.tccgrp.com/pdfs/SustainabilityFormula.pdf, foundationcenter.org/pnd/tsn/tsn_arch.jhtml.
- Anton Ressel is a Senior Consultant at Fetola and has over 15 years experience as an entrepreneur, trainer, business developer and mentor in the emerging business sector. He is a director of the Fetola Foundation and was a co-founder of Streetwires, one of SA’s largest and most successful social enterprises.