Why aren’t we trading more?
I’d found myself in the situation that many people in small and medium-sized charities find themselves: trying to find a new source of income or close.
I’d taken over the running of a Lottery-funded programme for young people mid-way through a four-year grant period. We were 100% dependent on one large grant, continuation funding was possible and the size of the grant ruled out most other single funders. If we didn’t find another source of income, the programme would have to close.
We decided to become a social enterprise – we developed a commercial offer and began trading to earn income. We offered a paid-for service to businesses and continued to deliver the programme to young people for free.
According to NCVO, the vast majority (82%) of our sector’s income comes from voluntary gifts/grants or fees/payment for the delivery of charitable activities.
As you know, increased regulation is making it harder to raise voluntary income from individuals and your programmes / institutional donor teams are probably not finding it any easier: increased competition, ever-decreasing public sector budgets, and overly-complicated commissioning processes are just a few of the reasons why contracts are becoming increasingly unattractive.
Trading to raise funds can be a great way to generate unrestricted income yet it makes up only 11% of the sector’s income (the remaining 7% comes from investments). So, why is this?
Many large charities are already trading and making a significant contribution to their overall income but my experience of many small and medium-sized charities is that they are not yet exploring it as a possible funding strategy.
I see a few perceived barriers to organisations growing their trading income, but I think that they are all surmountable…
Uncertainty / risk:
Years of testing and optimisation have meant that individual giving teams can pretty-much guarantee a return on direct marketing investment. There is a perception that trading / enterprise is more speculative.
However, with good pilot testing and financial modelling, you should be able to predict the outcome of your investment. Trading should not be seen as an alternative to other fundraising methods, it should be part of the fundraising mix.
I’ve managed the trading team at a charity and we were regularly moved around the organisation during restructures: we’d been part of fundraising, marketing and, at one point, finance. There were different views on the purpose of trading (income, profile, impact, etc) so no one could agree on where it should sit. Sadly, I don’t think that our organisation was unique.
Good strategic planning would help to define how trading can help your organisation to achieve its charitable objectives and ensure that it is given the necessary resources and leadership to enable it to thrive.
Lack of capital:
There is a perception that trading requires upfront investment. Sure, some ventures require significant capital investment (equipment, websites, premises, etc) but business models that are based on trading your intangible assets (skills, information, brand equity, etc) can be launched with minimum outlay. Even so, many trusts & foundations are keen to support their grantees to find ways to become more sustainable so your existing funders might be willing to contribute to your start-up costs.
Once you have evidence of some traction in the market, there are other funds available to help you scale-up and, if neccessary, become investment ready (e.g. Big Potential, Assess Foundation’s Reach Fund, and City Bridge Trust’s Stepping Stones).
Unfamiliarity / lack of capability:
This is linked to the point above about uncertainty. Some organisations just don’t know where to start (so they focus on the things that they know). Organisations like Frodas can guide you through the enterprise development process: helping you to develop the best ideas, to test their viability and to identify funding opportunities. Getting outside help will help you to minimise the risks and maximise the performance of your commercial ventures.
Trading to generate funds brought nearly £5bn into the sector last year, yet only 7% of it came from trading with the private sector. The opportunity for growth in this area is huge. If you can identify a market need and find a way to serve it profitably, you may have unlocked one of the most sustainable sources of your organisation’s income.
Tom Barratt, director and founder of Frodas - an independent consultancy that works with charities to grow their earned income and become more financially sustainable