Top Tips To Achieve NFP Financial Sustainability
1 May 2014 at 10:51 am
Is your organisation feeling the pressure to diversify its income streams? Here are six things to think about from Sandy Blackburn-Wright, Impact Strategist with the Centre for Social Impact.
One of the phrases I hear most these days on the lips of the executive teams of Not for Profits and their boards is the need to diversify their income streams. The recent drop off in government funding at both a state and federal level, on top of the pressure felt in the last few years with public fundraising, has forced organisations to consider their options.
Many are turning towards social enterprise development, improving corporate partnership approaches and impact investing.
Governments are also moving towards payment by outcome approaches for their new contracting arrangements. For most, these are worrying changes that will need some serious risk mitigation strategies. But they can also be great opportunities for underpinning the future financial sustainability of your organisation.
Here are six things to think about when exploring this space.
1. Explore the risk/return appetite of the board
Many boards in the Not for Profit sector are concerned with completely minimising risk if at all possible, even if their board members actively and successfully manage risk in their day to day jobs. It’s time to have a discussion with the board, not about reducing risk, but about what the risk/return appetite of the board could be over time. These changes present opportunities as well as risks and those organisations led by boards with a well thought through and articulated risk/return appetite will be able to be nimble enough to make the most of those opportunities when they arise. This will of course be a journey for most boards but start now
2. Assess your organisational strengths
There is a difference between your impact and your operational strengths. For example, the Leukaemia Foundation creates its impact in supporting for families affected by blood cancers and funding research to help find a cure. But when you consider their operational strength, they do a huge amount of property management and they do it very well. In understanding this, Leukaemia Foundation in Queensland is exploring a social enterprise where they can acquire property co-located to the Royal Brisbane and Women’s Hospital that can be used to accommodate families as well as provide a commercial revenue opportunity to help fund the organisation. Considering your operational strengths may help point you towards where your real organisational assets lie.
3. Consider the strength of your balance sheet
If you are hoping to develop a new social enterprise, enter a new contracting arrangement or engage in impact investing, you’ll need to know the real strength of your balance sheet. Many organisations act as angel investors for new enterprise ideas without thinking of it in this way – it’s a real investment. So before you invest, take a good look at the balance sheet with your board and decide whether you can hold any new investments on your own balance sheet or whether you are better off sourcing other capital or finding partners to share the risk. Keep in mind though, if you share the risk, you also share the return.
4. Look at the strength of your best program and measure its outcomes over time
For those organisations thinking about engaging in the government’s payment by outcome contracts, which includes social impact bonds, the place to begin is deciding how confident you are that your program can deliver the outcomes it promises under scrutiny.
It's one thing to believe that your work is making a difference. It’s another to risk your future cash flow on the program’s ability to deliver exactly as promised. So pick the program that you think has the most reliable and defined outcomes and start investing in measuring of those outcomes, preferable against publically available data. If the data is promising, only then should you think about payment by outcome approaches
5. Find the right partners who can bring capital and/or expertise
If you have decided that your balance sheet doesn’t have the reserves to seed a social enterprise, or cover your working capital whilst you wait for payments by outcome, then you’ll need to find partners. In some instances, it may be a case of partnering with a larger Not for Profit who works in a similar or complementary area and does have the reserves to see you both through.
In other instances, you might look to secure some debt or equity. Organisations like Foresters, SEFA and SVA can assist with debt and others like The Difference Incubator, Small Giants and Impact Investment Group can assist with a combination of debt and equity. If you are interested in exploring a social impact bond, the best partners will be the large banks who build bonds every day but they are most likely to partner with only the larger Not for Profit’s or a credible consortium
6. Become familiar with pricing risk adjusted return
The underlying theme of the changes that are happening here and around the world is the concept of risk sharing. In commercial terms, if an entity is asked to share risk, the risk will be assessed and priced and the higher the risk the higher the pricing or the return required to take on the risk.
The Not for Profit sector has historically taken on risk without this consideration, often feeling they didn’t have a choice. However, with a payment by outcomes approach where the risk sharing is far greater, the ability to price risk and agree on an appropriate return will be critical. If this is not done well, the organisation and the sector as a whole could be worse off. If however risk is well priced and organisations run well designed, impactful programs, these changes could be an enormous opportunity for the sector both in creating positive change and better financial sustainability.
About the author: Sandy Blackburn-Wright is a former Head of Social Innovation for Westpac and is the Impact Investment Fellow at the Centre for Social Impact and convenor of the Social Marketplace, an annual two day simulation of an impact investing market.
She has served on the Federal Government’s Not-For-Profit Reform Council since its inception in early 2011 and is on the Advisory Board for the Australian Centre for Not-for-Profit and Philanthropic Studies at QUT and a Director of the Community Services Industry Body.
Sandy will present a two-part webinar on Impact Investing for Not for Profits today at 2pm and next Thursday May 8th at 2pm. Find out more here.