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According to a survey by the Australian Institute of Company Directors , financial sustainability is the top issue keeping board members of not-for-profit (NFP) entities awake at night.

In an era of change, reduced government assistance and growing competition for each charitable dollar, it’s no surprise that funding is top of mind for NFPs.

Furthermore, returns on cash reserves held in traditional term deposits are barely yielding higher than inflation. Buildings that house core social and community services are becoming tired and in need of repair and the need to invest in IT, marketing and social media has never been greater.

NFPs are facing increasing costs and reduced income – not the perfect scenario for any organisation trying to achieve financial sustainability. In the face of this challenge, NFP Boards must think more broadly about what they can do to improve their financial sustainability.

Traditional funding options

To help this situation, NFPs could adopt the following:

1. Selling Assets

The sale of assets is a relatively easy strategy to release liquidity that can be invested in core operations. However, if funds are not used efficiently, or are just used to fund working capital, then they will be consumed and the organisation will go back to square one.

2. Diversifying Revenue Streams

Many charities are looking to diversify their revenue streams to reduce their reliance on government funding or other major income streams. Reducing your reliance on a specific funding source is a good strategy to reduce risk. However some NFPs are restricted in what they can do by their constitution. Another challenge, which is often overlooked, is that additional revenue activities can draw management away from the core competency and ultimately reduce their focus on strategic goals.

3. Mergers

Mergers and acquisitions offer the opportunity to share corporate overheads and improve margins. However in any merger it can be difficult to merge differing strategies and goals.

4. Attracting Diverse and Skilled Board Members

Introducing skilled experts on to your Board can improve the NFP’s efficiency in generating returns on capital employed, which should improve the organisations reserves. Specialists could be assigned to sub-committees that make recommendations to the Board. However, appointing too many non-executive Board Members may result in challenges in the decision-making process.

New funding options

The challenges facing the industry have led to the emergence of new funding options to help NFPs become financially sustainable. These are relatively new to the Australian market but have proved successful in overseas markets (with experts predicting they will grow in popularity at home) and are therefore worth considering as part of your strategy to improve financial sustainability:

1. Social Benefit Bonds

Social benefit bonds (SBB) are a type of ‘payment by outcomes’ funding mechanism that engages private capital. Typically, instead of a government paying directly for the provision of a social service, private investors provide capital to a service provider to achieve agreed-upon social outcomes. If these outcomes are achieved, the Government pays the upfront investment along with a financial return.

The attractiveness for Government is risk mitigation, cash flow management and the potential to promote innovation in service delivery via public-private partnerships. The benefit for NFPs is that the Government is more comfortable putting forward new and additional funding when the outcome of the investment is guaranteed.

Whilst SBBs have been popular in the US and UK, they are still in their relative infancy in Australia. In the past few years we have seen a successful $7m pilot programme in New South Wales to assist foster care families as well as three SBBs in Queensland in reoffending, homelessness and issues facing Aboriginal and Torres Strait Islander People. The Australian Government just released a discussion paper on Social Impact Investing in January 2017 to explore options to expand the number of affordable housing options in Australia, based on the UK model.

To be successful in pursuing this type of funding you need to be able to demonstrate confidence to private investors. This starts with transparent and accurate financial records.

2. Crowdfunding

Crowdfunding allows NFPs to set up an online fundraising campaign based on a specific project or program; this allows people to make a secure donation to the organisation via a third party website.

In Australia, crowdfunding has seen growth in donations per annum in excess of 300% in the past two years. This growth is attributed to the shift in fundraising through digital, mobile and social media, as oppose to the traditional method of ‘shaking the tin’ on street corners. NFPs can spread their message to the public much wider than before (even internationally), in order to expand their fundraising scope for the benefit of their programs.

Industry commentators highlight that the rise of crowdfunding is a reflection of the innovation currently being experienced in the NFP sector. Whilst this method may not suit all NFPs, it certainly is an option for additional fundraising sources that should be considered by NFPs to improve their organisation’s ability to attract income.
Achieving financial sustainability is no easy task for NFP entities which is probably why it is the top issue concerning today’s NFP leaders. Each of the above strategies has opportunities and drawbacks. To make sure that you are informed on these it is important to engage your accountant in any funding decisions.

 

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About the author

Steve Greene

Associate Director, Audit & External CFO Services

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