Diversifying income - but not alone

There are new income options that might be worth exploring by charities, including the burgeoning impact investment market writes Community Council for Australia CEO David Crosbie in Pro Bono News, 1 March 2018.

Diversifying income – but not alone

Telling charities they should diversify their income streams is a little like telling football teams they should score more goals – much easier said than done. There is no magic wand a charity CEO can wave across their organisation to suddenly deliver multiple income sources. But there are new income options that might be worth exploring…

Over the past decade, the charities sector has generally been gaining increased income year on year, driven largely by growth at the big end of the sector. Universities and higher education have collectively increased their income by billions of dollars each year since records have been kept at the Australian Charities and Not-for-profit Commission (ACNC). The same cannot be said of the small to medium sized charities where income trends indicate a stalling of growth in recent years and, in many cases, a loss of income.

Income may be a blunt measure of how well the charities sector is performing, but as anyone who has ever accepted responsibility for managing a charity will know, maintaining or increasing income is what enables many charities to fulfil their charitable purpose. Uncertainty about future income is one of the issues that keeps charity CEOs awake at night.

In considering the future viability of a charity the diversity of income streams is seen as a critical factor. A charity that is 100 per cent funded from one source – be it governments, service fees or philanthropy – is more vulnerable than one with multiple sources of income. It makes sense to have a diversified income stream.

There are three primary sources of income for charities: government funding; fees and charges from service provision; and philanthropic giving, grants and donations. All three of these areas of income are very hotly contested and not just within the charities sector. Increases in government revenue have stalled as demand for services has grown. The fundraising pie has stayed around the same size as a percentage of our incomes, and more charities are competing to attract donors and grants. Competition for income from fees and services is also increasing and not just amongst charities. For-profit providers are often competing for the same services. There is no low hanging fruit in these three orchards.

Two less significant, but growing income sources are debt financing and impact investment.

CCA has undertaken quite a lot of work across the sector to promote better use of existing assets, particularly as equity or leverage in accessing debt financing for medium to longer term investment. The most common example of this approach is charities choosing to buy offices or other accommodation which they partly use themselves, but also lease out to generate income, cover the costs of debt financing, and reduce their own accommodation costs.

Impact investing is an emerging option for a significant number of charities, which is one of the reasons CCA is now partnering with Life Without Barriers, PWC, Social Ventures and others to support better understanding of how charities can access the impact investment market.

What is most interesting about impact investing is how much potential growth there is in the investment pool. There are literally trillions of dollars held in superannuation and other funds looking for investments. It is estimated that the impact investment market in Australia will be well over $35 billion within the next five years. This is at least double how much money is donated to charities every year.

Given the accepted need for charities to diversify their income stream and the growing investment pool looking for impact investing opportunities, this market seems ripe for charities eager to increase their capacity. Unfortunately, the potential of the impact investment market is not being realised.

One of the most commonly identified barriers is that charities often do not have the tools, the time or the skills to translate great ideas and real potential into impact investment ready proposals. And why should they have these skills?

Charities are being asked to be many things to many people. The growing list of expectations is becoming unrealistic. Charities are being told they should be closer to their core values, closer to their communities, more responsive, more business-like, more accountable, more outcomes focused, more transparent, etc. etc. Preparing an investment ready prospectus for a potential impact investment should not be seen as yet another add-on task for over-stretched senior staff to do on top of fulfilling their primary purpose and mission.

Unlike business, which is used to buying in expertise, charities often try and save money by doing as much as possible in-house, as cheaply as possible. Charities avoid buying in external expertise.

One of the critical factors that will enable impact investing to accelerate to the next level in Australia is more charities drawing on the knowledge and experience of intermediaries that know how to work with both investors and charities.

The work of Impact Investing Australia, a handful of leading intermediaries, supporters from the finance industry, charities and advisory groups have established a growing impact investment market in Australia. With increased government support to further catalyse this market, the potential is enormous.

Impact investing is not a fix all solution that can fill immediate gaps in charity income. It requires new ways of thinking and working. But when faced with growing uncertainty, and increasing need to diversify income streams, the impact investment market is an option worth cautiously exploring.

If you like the look of the landscape, it might be time to consider exploring further with an experienced guide who can help navigate you to a diverse income stream.

Read in Pro Bono News: https://probonoaustralia.com.au/news/2018/03/diversifying-income-not-alone/

Special note: CCA are running a series of half day impact investment CEO forums involving dialogue and discussion with experienced impact investment intermediaries. You can find out more and register to participate here.