Charities need to focus on income diversity

Charities need funds to operate. They need to pay staff, support and manage volunteers, cover building and maintenance costs, purchase and update hardware and software, and so on. Many charities rely significantly on public fundraising to cover all the above costs, which can pose serious risks.

 

Relying on one source of income can be dangerous, especially if that source is unreliable. The more a charity relies on a single source of income, the greater the threat to the charity’s long-term financial stability.

 

That’s why income diversity is so important. Income diversity simply means that charities ensure income stems from several sources, allowing charities to spread risk, protect against potential shocks, and promote long-term financial stability.

 

Charities should aim to secure several income streams – and there are plenty available. They should look at grants from charitable trusts, government funding, donations from the public, contributions from corporates, earnings through trading, contract income through local authorities, and any other available income streams.

 

 

Charities need to prioritise income diversify

 

Sufficient income diversity means that, even if a charity’s main source of income is removed, they will be able to easily continue their operations and fulfil their charitable objectives. The importance of diversifying income has become particularly apparent in the past two years.

 

COVID-19 demonstrated how quickly and unexpectedly risk to income can develop. The pandemic highlighted the fragility of charity finances and demonstrated the urgent need for preparedness. Even as the pandemic settles, plenty of other risks remain, all of which could jeopordise the income streams of charities.

 

There is the obvious threat of economic risk, such as recession, hyperinflation, currency volatility; operational risk, such as restructuring and fraudulent activity; regulatory risk, such as changes to legislation, imposed tariffs; and so much more. And, of course, further geopolitical risks remain, including civil unrest, climate change, and, of course, another potential health crisis.

 

The abovementioned risks can put huge financial pressure on charities. And they can also put immense pressure on the bodies and people that fund charities. Purse strings may need to be tightened across the country and charities will likely feel the effects. Public fundingmay decrease, more charities may need government support, and competition for grants may become even fiercer. And donor behaviour could change, perhaps undermining the stability of one income source.

 

COVID-19 serves as an interesting example. It presented a double challenge for many charities: funding went down, demand for services went up. Charities suddenly needed to make less go further. Many charities rose to the challenge, maintaining service delivery and in some cases growing, and part of that effort was the immediate diversification of income. For those that didn’t, it meant having to cut back services and in some cases closure.

 

Charities had to quickly pivot during COVID-19. They shifted from the collection bucket to the Zoom call, from door knocking to social media, from letters to email. Charities incorporated other income streams to cover the loss of the previous stream, such as using virtual fundraising to fill the vacuum created by the loss of physical fundraising or pivoting to online fundraising rather than in-person. It was a process of reactive income diversification – diversification through necessity – which helped charities to fill the income gap created by the pandemic.

 

Interestingly, many charities noticed the benefits of that diversification. Many charities realised that virtual fundraising could bolster general fundraising efforts, providing a more stable alternative to solely physical fundraising. And some charities noted even greater diversification options, realising that in the future they could employ three different forms of fundraising: virtual, physical, and hybrid.

 

The act of diversification allows charities to raise more money, mitigate the risks associated with one source of income, and improve their long-term financial sustainability. COVID-19 has pushed reactive diversification, but charities should focus on the proactive, protecting themselves from myriad other risks.  

 

 

The importance of continuous assessment

 

Income diversification is not a one-time process, nor is it something that should be performed out of last-minute necessity. Income diversification is an ongoing, ever-evolving process, one that charities need to consistently revisit.

 

Proactive charities should perform regular assessments of income streams, attempting to quantify all money received. The assessment will support healthy governance, scope out potential problems in the future, and ensure long-term financial sustainability.

 

An assessment of a charity’s income diversity is simple, requiring only the will of the charity. The assessment needs to examine the following:

• The name of each income stream
• The money received from each income stream
• The costs associated with each income stream
• The risk of losing each income stream
• The impact of losing each income stream

So, for example, a charity could note that government funding accounts for 20% of total income and 18% of costs. They could note that they have minimal risk of losing that stream (between 0-10%) and the loss of that stream would only have a moderate impact. The charity can apply the same method for all income streams, until they have accounted for every element of their income.

 

We have created a flowchart below to help you consider each income stream, along with a definition of some of the main risks charities face. The flowchart is meant to encourage assessment, but it is by no means definitive or comprehensive. Use the flowchart as a rough guide, but decision-making should depend on a more detailed assessment, one that reflect the complexities of your individual charity.