A comment piece from our CEO Charlotte Newman. Part one of a series.
The penalty for looking too good
Community means more than a postcode
What happens when you run an organisation that has a unique, proven solution, with demonstrable growth, but it’s in a continuous battle to reach its 3-month reserve policy.
For those of you new to the charity sector, the dream for most small charities is to have 3-months of free reserves to see it through bumps in cashflow or allow for an elegant close. And before you jump to "can't you just get an overdraft", the answer is no.
Specific arrangements can be made for large charities with assets to act as security. For small charities however, the unpredictability and fluctuations in grants and donations as their core revenue stream mean that they are just too risky for banks to lend against.
In our case we're a few years away from achieving a "free reserves" position. Carefree took on social investment debt fairly early on in our journey to provide working capital for the organisation to build the digital infrastructure we needed to scale to the national operation we have now, so our management accounts will continue to show a net assets deficit for another few years until those repayment plans are completed.
So how do we manage the volatility of this situation in practice?
At least one strength from being a small team (in our case 8 people), is that everyone's role is in some way connected to revenue generation. Whilst myself, our CTO and comms team all support fundraising, our delivery team is out pushing for every pound of earned income they can muster. And yes, we charge a small fee to beneficiaries for our service. We try to get it covered by other parties but our reality is that we have to have some form of repeatable, reliable income.
If I'm stuck in a cycle of submitting grant applications that have a 6-9 month decision timeline and over a 90% rejection rate, my ability as CEO to open up the extra £5 or £10k needed to pay a bill is totally constricted.
There’s a merging of identities between charities and social enterprises that the sector hasn't quite caught up to yet. A lot of grant funders still feel uncomfortable supporting charities that generate a trading income - as if you can't be dedicated to working in the public good if you are trying to earn your way. Yet, even the largest charities are cutting their workforce by 25-50% because there is no open door to continuous philanthropic financing to cover your overheads anymore. Idealistic standards that costs should never fall on beneficiaries are unobtainable. We live in an era of earn or close - there's no escaping that.
I spend an extraordinary amount of time working on numbers. The perils of not being able to afford in-house financial management support, but it does empower me to "read" the business. The most illuminating conversations for me this year have been with prospective social investors and understanding what they see. Growth, but not fast enough growth. An organisation with a slipping level of donations and grants. Something that presents strong value for money for its service users but is reaching beyond its means.
This sounds incredibly counter-factual to our impact story - £16.87m generated last year for carers, their partners, communities and the state on an operating budget of £800k; an average of over 1,500 new carers signing up to the service every month and 800 break bookings. There's a powerful machine in play here - but from a financial perspective that machine will only cover 50% of our operating costs if we hit all our targets. Grants and donations have to make up the rest.
What blocks us as a high-performing small charity from being able to get grants? Well that’s a story for tomorrow’s blog.
For now, I’ll just sign off with this. If you’re a small charity CEO, find the truth of what trading solvently looks like for your organisation. That’s probably going to be some distance from the level of security funders would like to see but pretty much ok by normal small business standards.
Three things that would change this picture:
A call on major banks offering charity accounts to make more of their financial products like overdrafts available to charities as they would small businesses. A £10-£20k facility would be game-changing for an organisation like ours.
A call on trustees to have a more open discussion and view around their levels of risk tolerance. If your confident that the organisation is high-performing on every vertical that sits around the shaky financials that should offer you some protection from having to pull the plug.
A call on funders to relax the rules around reserve policies and net asset deficits. The chicken and egg of not being able to get money until you have money has never worked. High risk can reap high rewards - fuel the impact you want to see in the world and don’t let your best organisations crumble.
Thank you for reading. If you think Carefree deserves a bigger platform, and that small charities like ours deserve greater grant and funding support, the simplest thing you can do right now is share this post, follow our work, or connect with me directly.
And if you're a funder, journalist, or commissioner who wants to back genuine social innovation, please contact me here.
