Top Tips 4
The Secrets of Financial Sustainability
Financial sustainability means…
'Financial continuity and security.'(A. Fowler)
'The organisation and its core work will not collapse if external funding is withdrawn.' (M. Norton)
In practice, organisations which fulfil these definitions are characterised by :
- A diversified funding base
- Availability of unrestricted funds
- Availability of financial reserves
- Strong stakeholder relationships
A diversified funding base
It is important to have a financing strategy which produces several different sources of income. It does not make good sense to put “all your eggs in one basket”. To rely on just one or two donors for your income makes you vulnerable to external threats.
Diversification means securing funds from as wide a base as possible – the local business community, national and local government and the general public – and not just from external, institutional donors such as USAID or DfID.
Availability of unrestricted funds
Funds that are received from donors for a specific purpose are known as restricted funds: you are legally obliged to use them for the reason that the donor gave them to you.
In contrast, unrestricted funds can be used for anything at all that helps you to achieve your mission. The more unrestricted funds you have, the more freedom of action you have. You can choose and change the projects that you want to run and you can cover costs that donors are reluctant to fund, like core costs.
We have to look beyond institutional donors for sources of unrestricted funds, for example: membership fees, advertising income, fee income, general appeals and bank interest.
Having a regular source of unrestricted income is essential for the next feature of a financial sustainable NGO…
Availability of financial reserves
Reserves are financial resources that an organisation builds up during its lifetime (from surpluses of unrestricted income) and puts aside to meet unexpected events in the future. These funds are sometimes kept in a special ‘reserves’ bank account and are shown separately on the annual financial statements.
Building up reserves has a number of obvious advantages for NGOs. It reduces their dependence on donors, helps during cashflow shortages and helps to withstand financial shocks and unplanned expenditure.
Strong stakeholder relationships
The more that you can build up and manage a positive relationship with donors, the stronger position you will be in. True ‘partnerships’ occur when back-up and financial support is provided in the good times and the bad times.
The key to financial sustainability is to develop your relationships with an eye to the future as well as meeting today’s needs. This means building the confidence of donors over time. For instance, it may not be appropriate to press them for funds today, if you believe that you might win more funds from them in the future.
It is a mistake to take funds for projects that you cannot deliver, just because the money is available. This will harm your relationship with the donor and reduce the chance of winning funds that you really need next year or the year afterwards.
Want to learn more?
Mango’s Training Course Financial Sustainability Essentials - How to Build a Financing Strategy (FM2) course covers all of these topics and shares practical tools and techniques to make financial sustainability more than a dream. Why not join us on the next event?
See our calendar of courses around the world:
See Mango’s Guide to Financial Management for NGOs for free advice and tools, including a section on financial sustainability. See: www.mango.org.uk/guide
Mango: international specialists in financial management for NGOs
Mango inspires NGOs to make more of their money by: running training courses, recruiting finance staff, advising NGOs and publishing free tools & guides: www.mango.org.uk