It is useful to analyse our different sources of income into two broad classifications:

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1 It is useful t analyse ur different surces f incme int tw brad classificatins: Restricted r unrestricted an indicatr f flexibility Shrt- r lnger-term an indicatr f cntinuity Figure 1 cmbines the tw classificatins and illustrates hw NGO incme surces fall int different categries accrding t the level f restrictin applied t the funds and their level f cntinuity. Unrestricted funds are exactly what they sund like funds that cme t the NGO withut restrictin n hw they are used, prviding f curse, they are used t fulfil the NGO s bjectives. In general, grants frm dnr agencies are restricted funds since they usually cme with terms and cnditins abut what the funds may r may nt be used fr. S it is the incme that an NGO generates thrugh its wn effrts that tends t be in the unrestricted categry such as membership fees, fundraising events, general dnatins and bank interest. This free mney brings greater autnmy, flexibility and security fr an NGO and is therefre central t a financing strategy. Figure 1 Funding Types Matrix Unrestricted General fundraising Cre financing Shrt term Lng term Prject funding Prgramme funding Restricted Take a mment t analyse yur NGO s surces f incme and see where they fit n the funding types matrix. In general, it is gd t have a mix f funding types, but very imprtant t have sme in the tp right quadrant.

2 Shrt-term and relatively unrestricted incme, such as ne-ff fundraising events and public dnatins. Useful fr building up reserves r fr gap funding (i.e. where a prject funding agreement fails t cver 100% f csts) but nt fr lng-term cmmitments. Shrt-term and relatively restricted incme, generally frm institutinal dnr agencies. Being prject-specific, these funds generally last fr 1-3 years and are difficult t extend further leading t a lss f prject cntinuity. This is the mst cmmn frm f NGO financing. Lnger term with sme restrictins, these are funds prvided by funding partners where a strng wrking relatinship has been established and where grants are based n prgramme themes. This is incme which can be relied upn as regular and flexible, s is mst likely t be used fr the NGO s cre peratins. This type f financing helps t meet Nrtn s definitin f financial sustainability: The rganisatin and its cre wrk will nt cllapse if external funding is withdrawn. External r institutinal dnr funding i.e. frm internatinal r multi-lateral aid agencies such as DfID, USAID r UN agencies is the main fcus fr mst NGOs financing plans. Hwever, there are challenges assciated with such funds. There is excessive demand fr external funding acrss the glbe. At the same time, dnr gvernments are experiencing increasing demand fr use f funds fr dmestic prblems. Funds available previusly may be switched t ther beneficiaries at shrt ntice, reflecting changing plicy initiatives. There are several quality issues attached t external dnr funds: They tend t reflect external sci-plitical trends i.e. the pririties f the dnr cuntry are uppermst and may interfere with lcal strategies. External financing tends t favur large NGOs wh are cnsidered (rightly r wrngly) t be a safer bet fr the effective use f the scarce funds. External financing is ften dependent n bilateral agreements that dictate terms t beneficiaries e.g. nly fr use with specific target grups r regins. Plitical tensins have resulted where external dnrs have channelled funds t NGOs rather than natinal gvernments. Dependence n external finance may bring abut plitical dependency: pawns f freign interests. External financing is usually in the frm f time-limited prject-specific grants there will always be a need t return t dnrs fr additinal financing. External finance can lead t a lack f cst-efficiency and ver-ambitius prgrammes. In particular dependency n dnr funds can result in lack f attentin paid t ptins fr cst recvery, cst effectiveness and sustainable prgrammes.

3 Unrestricted funding is liberating fr any NGO. It allws NGOs the freedm t wrk t achieve their bjectives in whatever way they think is best, withut restrictins frm dnrs. All steps shuld be taken t maximise the level f unrestricted funding available. This ften requires a significant investment f time, effrt and mney. Surces f unrestricted funding vary fr all NGOs. An NGO has tw brad ptins selffinancing and lcal financing. Self-financing cncentrates n generating incme and supprt thrugh an NGO s wn effrts. Included in this categry are: Membership fees and subscriptins. Fees fr services, e.g. training and cnsultancy. Incme generating activities linked t wrk f the NGO, e.g. publicatin sales. Incme generating activities nt linked t wrk f the NGO, e.g. renting ffice space. Investment incme frm reserves and endwment funds. Dnatins and gifts in kind frm supprters. Many NGOs are rightly uncmfrtable charging fees fr their services. Services have t be accessible t even the prest and mst deprived. Hwever, recvering csts by charging fees brings three imprtant benefits fr NGOs: The level f incme increases in direct prprtin t the level f activity. This is a sustainable mdel. Fee incme is unrestricted incme. Beneficiaries value what they pay fr mre than what they d nt pay fr. Fees can be set at a level which makes a cntributin t the cst f prviding the service, rather than cvering 100% f the cst. Charging beneficiaries mdest fees can really strengthen an rganisatin s sustainability. This will be gd fr tmrrw s beneficiaries as well as tday s. Lcal financing cncentrates effrts n gaining financial supprt frm the lcal cmmunity and institutins. This includes: Fund-raising frm the general public e.g. thrugh legacies and regular giving prgrammes. Fund-raising frm specific sectrs e.g. legal r medical prfessin. Lcal gvernment grants and partnerships. Natinal gvernment as an NGO dnr r NGOs as sub-cntractrs t gvernment. Businesses spnsrship and dnatins, r prvisin f skills and facilities.

4 Figure 2 illustrates where an rganisatin is nw and where it wants t be at a specified pint in the future. The answer t Hw will we get there? is cntained in the financing strategy. In deciding the best strategy fr diversifying yur funding base, yu shuld start by undertaking a resurces audit in yur rganisatin. This will help yu t assess what is, r is nt, feasible t achieve within a financing strategy. Use the fllwing headings as a checklist: Peple t rganise the incme-generating activity Skills and experience e.g. marketing, fundraising, and saleable skills Mney t invest in the activity e.g. fr adapting ffice space t let Capacity t respnd t requests e.g. ffering cnsultancy r training services Cntacts with prminent peple i.e. thse wh have influence in business cmmunities Cmmitment f supprters e.g. t help with fundraising drives Credibility f the rganisatin as a marketing tl Time t rganise events Markets fr yur prducts Althugh there are many different pssibilities, it must be recgnised that financial selfsufficiency is difficult t achieve: self-financing invlves a lt f time, effrt and special skills; nt all rganisatins activities lend themselves well t self-financing schemes; and there is a danger that the rganisatin may lse sight f its bjectives (the tail wagging the dg syndrme).

5 This is nt a stark chice: full financial self-sufficiency r ttal dnr dependence. And we must nt frget that dnr rganisatins d exist t prvide funding. 100% Dnr dependent Where are yu? 100% Selffinancing When cnsidering financing strategies, yur NGO may pt fr a strategy smewhere in between the tw extremes. One apprach is t meet perating verheads (rent, staff salaries, maintenance csts, utility bills, etc.) thrugh fundraising activities, and t finance prgramme csts thrugh cnventinal dnr surces. In this way an NGO can mre fully integrate itself int its lcal cmmunity, maintaining cntrl ver its lng-term peratinal and strategic develpment, and access surces f external finance nly fr prgramme-specific activities. A gd starting pint is t identify hw dnr dependent yur NGO currently is and hw lng it culd survive if all its external aid were suddenly withdrawn. We can use what is knwn as rati analysis t d this see the frmulas belw. Taken tgether with ther infrmatin, these indicatrs will give a picture f the financial vulnerability status f the rganisatin. Yu can then set targets fr imprvement in say, 5 years time. Clearly, an NGO which is 100% dnr dependent with sufficient funds t last apprximately 10 days, is a lt less sustainable than ne which is 50% dependent and has enugh t keep ging fr 90 days. The ideal target will depend n yur wn NGO s circumstances but nce established, this can be used t guide the financing strategy. T calculate where yu are nw, yu will need the latest set f annual financial statements i.e. the financial reprt including a Balance Sheet and an Incme and Expenditure (smetimes called Prfit & Lss) statement. T calculate the Dnr Dependency rati: TOTAL DONOR INCOME x 100 [result will be expressed as %] TOTAL INCOME T calculate the Survival Rati rati: GENERAL RESERVES* x 52 r x 365 days] TOTAL INCOME [result will be expressed in weeks r * General Reserves are the unrestricted reserve funds saved up since the rganisatin began. They will be listed n the Balance Sheet and may als be referred t as General Purpses Funds r General Funds. If yu cannt find this figure, use the figure fr Net Current Assets instead.

6 The search fr alternative surces f finance can be likened t an entrepreneur lking fr investment pprtunities. NGOs wishing t becme financially self-sufficient r wishing t diversify their surces f funding need t adpt a mre business-like apprach. Traditinal budgeting practices in NGOs are based n allcating resurces made available thrugh external funding. A shift twards financial self-sufficiency requires a drastic change in apprach t budgeting i.e. yu must set yur expenditure budget first based n activity plans, then g ut and find the incme. This may require a fundamental re-assessment f beliefs and practices within the rganisatin. Staff are ften ill equipped in business practice and methdlgies, and the culture f an NGO is ften ppsed t that f a fr-prfit cmmercial rganisatin. There is a risk that cmmitted staff may be driven ut by this change in the rganisatin s culture, strategy and practices. The mtivatin t mve twards financial self-sufficiency shuld be a genuine ne. Many NGOs may see this mve as a questin f packaging their apprach t dnrs. Whilst this is undubtedly an imprtant mtivatin in the ever-mre vigrus cmpetitin fr dnr funds, an rganisatin that is mtivated in this way is unlikely t have made a rbust assessment f the implicatins f financial independence n the rganisatin. An NGO s decisin t pursue the rute f alternative financing shuld be accmpanied by a thrugh strategy assessment and planning prcess. NGOs, as values-based rganisatins, generally have a strng scial eths and identity, shared by members and staff. The changes that have been discussed abve are ften seen t threaten the sense f shared purpse r visin f the rganisatin. Many NGOs, fr histric and plitical reasns, may have a hstile view f business. The backgrund f staff may be such that they have had very limited expsure t cmmercial practice. Sme NGOs g as far as creating a separate rganisatinal entity dedicated t fundraising, in rder t prevent perceived explitative business practices affecting the rest f the rganisatin. Increasingly, thrugh changes such as privatisatin and deregulatin, business practice is becming mre acceptable and seen as essential fr a prfessinal apprach t management. Related t this cultural issue, is the challenge f managing tw different types f staff. It is likely the NGO will recruit new staff t administer fundraising and financial management activities. Perfrmance and incentive structures fr these new staff may need t be significantly different t thse f their clleagues invlved in the cnventinal activities f the NGO. NGOs may perceive these differences in practice and culture t present serius management difficulties.

7 By increasing the levels f self-financing, an NGO may make its legal status ambiguus. As a nn-prfit making rganisatin the NGO usually benefits frm a series f legal exemptins related t, fr example, taxatin regulatins. If, thrugh changes in surces f funding, the rganisatin starts t make a financial surplus (i.e. prfit ), the legal status f the NGO as a nt-fr prfit bdy may be challenged. Depending n the legal envirnment in which the NGO perates, this lack f legal clarity may be a deterrent t alternative financing strategies. Plitically, the NGO may als find itself pen t the criticism f disguised prfit-taking and explitatin, als damaging relatinships with the business cmmunity. Careful public relatins strategy and transparent gvernance practices may g sme way t smthing plitical sensitivities.