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Wednesday, 28 January 2009

On 09:23 by RT   2 comments
I recently wrote a post on whether or not social enterprises would survive the credit crunch, where I suggested that many would pull through as I believe the crunch will only help drive social innovation faster. It will embed the recognition that we have to be able to help each other, and create not just environmentally sustainable businesses, but also financially sustainable ones.

Unfortunately I'm not sure this ability to survive will extend to charities that are entirely dependent on individual, organisational or governmental funding.

Charities often start small and very community focused. Their goal is clear and staff voluntarily make it happen. They have a small number of funders, if any. At this stage they are agile and able to cope with change easily.

But as they get recognised, other people and bodies become interested and the charity starts raising more funds to increase the scale and quality of their impact. The organisation thus solidifies and formalises, and their ability to adapt and control their own destiny decreases – in a large part due to the way they have to be set up.

In the UK, Charities differ from commercial organisations in that they are exempt from all taxes except VAT. However, the tax structures for charities means that they cannot engage in any overtly commercial activity as profits made will become taxable and, at worst, the organisation may lose its charitable status altogether.

Members also cannot take any benefits and no dividends can be paid to them. Any funds must be applied for charitable purposes only, and if it is wound up, the funds must be transferred to another charity.

In small charities, this classically drives organisational and human structures that do not look to create or exploit commercial revenue streams even though they often have a range of intellectual and physical assets that can be monetised. At some point in the growth cycle, incoming funds stop adequately covering operational cost, and from then on it becomes an ongoing battle to raise money to survive. The social imperative of the organisation starts becoming secondary to the need to raise money.

What the organisation achieves starts becoming driven by what likely funders are looking for, rather than the core social impact it was set up to make. Over a period of time this often results in a dispersion of activity and diminished quality of outcomes - lots of small impacts rather than any major core difference. The diminished quality of outcomes then adversely affects the ability to raise funding, and alongside growing operational costs, forces the charity further into the spiral of doing whatever it can to raise money to survive.

Now that we're faced with environmental recession, the negative impact on grants and funds available might just mean that a lot of medium sized charities will simply go under as their funding dries up and they run out of revenue streams.

The sad part is that this does not have to happen. There are ways that charities can commercially generate their own revenue through the use of trading subsidiaries. I’ll explore this further in my next post, along with some thoughts on the need for new charitable structures that automatically work this way, rather than being designed to exploit structural loopholes.

2 comments - add yours:

Anonymous said...

This is a very pessimistic view of the charity sector. I have a more hopeful view that many charitable organisations will survive the credit crunch. Those charities that fail will be those who refuse to engage with the world as it is and to make changes to cope with the pressures on funding and support that the credit crunch will impose on all of us.

I believe that modern, forward looking charities are already running associated trading arms and forging partnerships with commercial organisations in which entreprenerial skills can be used effectively.

The chaity that I work for has been around for almost a hundred and fifty years. We have a great team of trustees, staff and volunteers who have inherited a great deal of wisdom and experience from our predecessors and will add that to our own initiative and determination to succeed.

Dave Thomas

RT said...

Dave, you're absolutely right. This is just what I was going to move on to in my next post. Charities that have been around a long time and have well established business models, will survive the credit the same way as social enterprise will - positively. Unfortunately for a lot of small community charities, this will not be the case. It is not as simple as suggesting that the struggle is a function of refusing to engage with the world as it is, but more a case of difficulties in adapting to major environmental shift without free capacity or funding to enable change.