How NFPs Can Budget For Sustainability

It’s Not for Profit budgeting time and systems expert George Liacos discusses what he describes as two fashionable paths that Not for Profits are now taking to budget for sustainability.

 It’s almost the end of the financial year and that labour of love we call budgeting is nigh. This is when the sector looks to the income lines and sighs, and then to the expense lines and … closes the spreadsheet to do something else…

I guess most people’s experience would be to start this task with gusto and resolution, enter all those things we can’t change in first, then tinker with the discretionary items.

The changed funding climate means that not only are leaders locked in the expenses, but the income lines are looking decidedly uncertain. Or so it seems…

This month alone we have seen leaders from the disability, peak body and skills councils sectors come at this from a different, positive perspectives.

The winds of change are pushing the concept of sustainability to the forefront of everyone’s mind – no longer is it a ‘wouldn’t it be nice’ thing – it’s a ‘this needs to happen’ thing.

At its heart, sustainable budgets are not ones that are short term, slashing expenses to fit inside slimmer purses. They take a longer view… the columns in the spreadsheet stretch out to the right as they take in the future. They start not from a premise of “what does it cost to do what we do”. They do start from “what problem do we exist to solve, how valuable is that and who will pay to solve it?”.

From there they ask two serial questions:

1.      What will it cost us to deliver our new value proposition to beneficiaries?

2.      How do I bridge the cash-flow until enough customers are paying enough to sustain us?

We all know that the boundary between private sector and Not for Profit is blurred. This is how the private sector budgets… with a few tweaks for us here in the NFPs.

This is budgeting based on a business model not based on history and asks us to lift our eyes from expenses to income. Business model based budgeting makes us think beyond fundraising, philanthropy  and grants. It asks us to unpack what value we promise, how we might monetise this value and rethink who will pay for it (remember to differentiate the ‘beneficiary' from the ‘ customer’).  

This is distinct from an expense plus x per cent approach to budgeting.

Design your future, then design the budget.

Here are two fashionable paths we are seeing Not for Profits take to budgeting for sustainability:

1.      Spin-off a Social Enterprise: this is typically manifest in the form of something like a spin off café. This approach is relatively small in risk sense, and with dedicated bootstrapping, means budgeting for lower capital costs, but not expecting huge returns either. It means the income lines will contain uncommitted income lines that are dependant on sales. The expense lines will start to have even more variable costs.

2.      Move your core towards a model of Social Business: this approach involves leveraging intrapreneurship to change the business model for scale and impact. This usually means commercialising part of the organisation to create a new revenue line, exploring new markets, engaging with technology and partnerships for disruptive change. In budgeting for this option, the balance sheet will likely be affected, the understanding of loss leadership needs to be understood, and Boards must be willing to accept the risk of investment. Examples we’ve seen recently of this include spinning off technology products and commercialising IP and service models to take to overseas markets.

To explain the difference between Social Enterprise and Social Business I’ll borrow from the words of Cheryl Kernot– the Director of the Graduate Certificate in Social Impact and Social Business- from a discussion we had last week:

“What’s really compelling about social entrepreneurs and their businesses is that they go way beyond the older model of tweaking at the edges of the charity and not for profit culture: they challenge conventional structures and effect systems change.”

The discussion is turning away from “social enterprise” and more towards “social business”. While the goals are similar – the differences in how to achieve those goals are stark. Think café to company.

Social Enterprises are, more often than not, founded with a charitable intent. The employees are usually volunteers or people from within the social sector. They have small turnovers and will usually have a blended funding model – relying on both earned revenue and grants. Under pressure, they will lean towards their social objectives.

Social Businesses, however, are more often started with a “business first” intent. Larger turnovers are expected and they will rarely seek or attract funding through grants – being more likely to concentrate on earned revenue and commercially oriented capital. As a fall back they skew more towards commercial objectives.

We are already seeing the corporate world begin the transformation towards Social Business, through great such trends as B Corp Certification. The Not for Profits that take the same steps are set to be the most successful, from both an impact and financial sustainability perspective.

Be bold this budgeting season and see what it looks like to budget this way.

We are currently producing a whitepaper on Social Business models – if you’d like to find out more, or if you are interested in contributing, please drop me a line at George@sparkstrategy.com.au

About the author: George Liacos is the Managing Director of Spark Strategy, an agency that works with Not for Profits and Social Enterprises to realise their social mission objectives. Liacos has advised Not for Profits, Social Enterprises, Governments and Commercial organisations for over 18 years in the areas of new business and funding models, business and digital strategy, and system transformation.