The landscape for charities is, as always, unpredictable, so it’s important to build in resilience at a financial level to safeguard your charity’s future.
This means understanding the risk of funding concentration.
In essence, you are at funding concentration risk if a large proportion of the income your charity receives comes from one single source.
For example, if a funding source accounts for approximately 50% of your charity’s income, this source will be considered a single source as it forms the majority of your income.
(It’s important to note that this percentage can be lower and is dependent on your charity, its structure, and your exposure and tolerance to risk (income risk depends on a lot of variables, including your charity’s reserves, which we’ll look at a little further in this post).)
The risk of funding concentration should be an area closely monitored by trustees, as if you rely so heavily on one source of income, what happens if this suddenly stops or the funding is pulled? And how can you easily and quickly continue operations to ensure the community you serve is unaffected?
Sources of income
There are various sources of income charities can tap into; these can include:
Grants – often specific for a set piece of work or project and can come with associated terms and conditions (making them restricted funding, i.e. money can only be used for what is specified and nothing else).
Donations – money or gifts that are freely given (unrestricted), by various donors and supporters of your charity.
Fundraising – events and activities held throughout the year to raise awareness and additional funds. Can include sponsorships and online campaigns too.
Corporate sponsorship – organisations choose your charity to support and raise money throughout the time period set.
Contracts – income for delivering commissioned public services.
Legacies – Gifts left to a charity in someone’s will. Legacies can be valuable but are often unpredictable in both timing and value.
The more income streams you identify that work for you and your target audience, the higher levels of stability and resilience you can build.
Signs you may be over-reliant on one funder
There are several signs to be aware of as a trustee that will show if the charity is becoming too dependent on one funder. These include:
- 30-50% of the income the charity receives comes from one single source, even if this is mix of grants and contracts from a local authority, for example.
- There are deficits in the budget until one source of income comes in to fill the financial gap.
- Strategic decisions are driven by the main funder compared to mutual trustee discussion and primarily what is best for the charity and charity purpose.
- There is a lack of unrestricted reserves for everyday operations.
Risks of single source
The main risk of relying on one source of income is that it can put your charity in an incredibly vulnerable position.
If that one major donor, or single source grant, or long-term contract that you have relied heavily on suddenly stops, you run the risk of plunging into operational crisis, leading to an inability for the charity to continue to deliver its core services, and in the most extreme cases, fall into potential insolvency and cease operating altogether.
It’s not a nice thought and may sound severe; however, it is a possibility if income isn’t planned and also questioned (constructively) by trustees to understand all sources of income and the impact these have on the charity now and also in the future if these funding streams cease.
This is where building financial resilience through income diversification comes in.
Benefits of a diversified income stream
We encourage all charities to diversify their income streams to build sustainability and resilience, but also to create a financially stable future.
In addition, diversification helps to spread the level of risk, so that if one donor ceases or a grant application changes, it is not the end of the charity. Instead, the charity can pivot, adapt, and put contingency plans in place without service being affected.
In turn, this helps to create a small element of predictability (which we like), allowing core operations to continue.
Exploring new income streams can also bring with it new opportunities and potential partnerships. Where, working together and collaborating with others can support income and introduce new services.
For trustees, income diversification should be a topic of discussion around the board table, especially when finances and future planning are on the agenda. Understanding income sources and, in particular, ensuring that the charity is not reliant on simply one helps with management, planning and organising finances and also builds trust with both internal teams and external customers.
Planning for the future
Income planning and diversification should be an ever-evolving and continuous process that is revisited regularly.
For trustees to be more proactive in this area, key questions to ask about funding sustainability should focus on:
- How much have we got in reserves? Is this ok? Does it meet our purpose? (Make sure to check out our post on budgeting and reserves, which provides information on how much charities should hold).
- Where does the charity income come from and how much comes in? What are the costs associated with this income stream? The level of risk to the charity of losing this and the overall impact of losing this.
- What are our criteria for risk? How much risk are we willing/able to accept?
All of these questions and more should be included in your charity’s organisational risk register. A continuously updated document that identifies and logs risks, evaluating them with a risk score, and includes controls around managing this risk if it should occur.
Charity managers must make sure to share and also include trustees in the development and review of the risks included in the register, as well as share information with your wider community with appropriate statements regarding risk management included in annual reports.
(You can find out more about Charities and Risk Management on the Gov.uk website.)
It’s vital that as a charity you remain in a position where you can cover all costs as well as continue to deliver your charitable purpose.
For trustees, this means preparing for the future and planning for long-term sustainability and financial stability by analysing all sources of income and looking at the risks associated with each.
