VCSE Business Models and Managing the Money

Understanding the VCSE business model

A business model is a generalised notion of the core aspects of how an organisation works. In the context of this article we are focusing on how organisations get the resources they need to deliver the services they want, and how this impacts and is impacted on by an organisations relationships, the nature and way they reach beneficiaries, structure and other parts of the overall business model.

For a village hall the business model might simply be ‘we will aim to cover our general running costs through our hire fees and apply for grant funding to cover major projects and refurbishments’. This prompts more specific the questions such as ‘how many hirers do we need and, who are they, and what fees do we charge?’ and ‘how much do we need from major funders and who are they?’. The answers allow you to create a detailed plan and test whether your business model works (if you need the hall to be in use 25hr a day to breakeven you’ve got a problem). The business model itself isn’t about these specifics but the general approach. Not getting a specific hirer or grant fund doesn’t break the business model, but there being no hirers or funders does.

There are a wide range of business models in the commercial world. Selling a product as a one-off or selling it as an ongoing subscription is one example; as is so-called ‘bait and hook’ –  giving away or selling cheaply one product that is linked to a more expensive second product (think razor and razor blades or a free phone with a monthly contract). Another is franchising a service, rather than expanding to a range of different locations yourself.

They have their equivalents in the VCSE sector but for many organisations the business model is about the mix of grants, contracts, fundraising and paid-for services the organisation has (or would like to have). The key element is how this affects their delivery and the level of risk and sustainability.

Vulnerable bits of the sector

In our last edition we talked about the 4 Cs as a way of describing different parts of the VCSE sector: those that are commissioned to provide services, those that campaign on key issues, organisations that raise funds that allow them to commission and groups that are based in the community.

This time we’ll look at the sector in terms of vulnerabilities, sustainability and business models particularly for the “pulled middle”.

Community organisations can be fairly indestructible in business model terms. Often they rely heavily on a handful of committed individuals and the biggest risk is when these people are no longer involved .In terms of funding their needs to keep going  are very small and this model is sustainable as long as they can recruit appropriate volunteers.

Commissioned organisations have a clear model in terms of bidding for and securing generally public sector delivery contracts. There are major issues about the nature size and scale of commissioned services going forward as public sector spend continues to reduce and needs in some areas continue to rise. There are also concerns with how commissioned service work alongside those supported through fundraising or other income. The model is however clear and whilst there will be winners and losers some services will continue to be commissioned.

The challenge of the ‘pulled middle’ is when the business model says ‘We rely on a single grant for most of our services, and towards the end of that grant we apply to other funders to secure replacement income, tweaking our services to meet funders’ requirements’. This while there’s enough grant funding to sustain it but carries a lot of continuity risk.  One option might be to keep doing what they are doing and hope enough bids will come off, trying to diversify away from a single funder, or adapting what they are doing within a broadly similar operating model. The ‘pull’ tends to be on internal resources, going from managing a single fund to trying to develop and manage lots of different elements. Organisations in this category are under increasing pressure, having to increase fundraising efforts or charge for services.

Being pulled to a more community based business model raises the challenge of having to reduce levels of services and staffing. Being pulled to a commissioned based model brings the challenge of a significant development curve required to achieve this as the environment becomes more competitive.

The Sector-Led Plan highlighted that a range of organisations were identifying fundamental challenges to their business model.  As your funding changes you need to ask yourself  whether this is about single events, or trends that could threaten how you operate.

Managing the money

Reserves

Do you have too much or too little in reserves? It’s not what you have in the bank but why you have it there. Money held without specific purpose is not good. Charities should ensure they use resources effectively to support their objectives and beneficiaries. Occasionally organisations accumulate excessive sums on a just-in-case basis.

Conversely, holding no reserves is high risk, leaving you susceptible to cash-flow issues if your income doesn’t come in quite as planned or an emergency purchase is needed. You should have a reserves policy that states how much you should hold and why you need it. Consider:

• A number of months’ running costs. How many will depend on consistency of your income spending commitments.
• Enough funding to cover liabilities if you needed to shut down.
• Endowments of capital sums that are used to generate income.
• Funds needed for redevelopment or new project. If you are not at your target try and save towards it. If you are at your target think how you can use excess money to better forward your charities objectives.

For more information see CC 19 Charities and Reserves

Trustee Responsibilities

All trustees – not just the treasurer - are responsible for the financial management of the organisation, and need to make sure they understand the organisation’s finances. How will their management be judged?

There are two principal duties when fulfilling your financial responsibilities.

• ‘Proper care and diligence’: A trustee will not be held personally liable for wrongdoing by any financial agents if the board of trustees has given proper attention to the appointment, duties and supervision of the agents.
• ‘Prudence of ordinary men and women of business in the management of their own affairs’: This requires trustees to satisfy themselves that the financial affairs of the charity are being properly handled, in the same way that they would manage their own finances or those for whom they were morally responsible. Ignorance of what is happening, or the absence of dishonesty on the part of a trustee, is not accepted as prudent behaviour. As a trustee, it is your responsibility to find out all relevant information.

Key questions to ask at board meetings:

• Are we running a gain or a loss?
• Are key expenses under control?
• Do we have sufficient reserves?
• Do we have an investment policy?
• Is cash flow adequate?
• Where are we compared to budget?
• Is our financial plan consistent with our strategic plan?
• Is the staff satisfied and productive?
• Are we filing reports on a timely basis?
• Are we fulfilling our legal obligations?

Click here for a fuller explanation.