Financial Sustainability is Key

By Tendayi Matimba, financial manager WageIndicator

Financial Sustainability has become one of the key concerns for trade unions, employers’ associations, and labour support organisations around the world. Casualization, precarious and insecure work, jobless growth, outsourcing to certain i.e. Asian low-income countries, redundancies in the public sector, all have a negative effect on their membership and income base. Membership is and should always be the core source of income for trade unions and employers’ associations. Reality shows that at least trade unions have become more dependent on project income.

However, the present trend is that also project income is drying up for basically two reasons. Solidarity contributions by their sister organisations in the richer countries are dwindling because its membership base erodes by globalisation, which leads to a shift of work towards low-income countries, resulting in job loss ‘back home’. Also progressive automatisation and robotisation increasingly take up work without replacing it with new work on a one-on-one basis as had still been the case in previous phases of the long term ‘industrial and service revolution’. At the same time, due to the persisting global and regional economic crises, available government funding faces cut-backs, hence less funding becomes available from national budgets. This poses challenges for all organisations active in the world of work, including WageIndicator! Below we present some of the ingredients for review in order to improve one’s financial sustainability.

What is Financial Sustainability?

‘An organisation is financially sustainable if its core work will not collapse, even if external donor funding is withdrawn.’ (Norton)

‘Financial continuity and security’. (Fowler)

‘When your work is recognised to the extent that you don’t have to fund-raise’.  (quoted in Fowler)

Financial Sustainability versus Organisational Sustainability

Financial sustainability is not enough for an organisation to stay afloat. Sustainability revolves around the relationship between ‘resources, impact and organisational regeneration.’ In other words, it is not enough to have resource availability. An organisation must also make an impact on its environment and be willing and able to adapt and learn from its environment. 

What are the Main Ingredients of Financial Sustainability?

Diversified funding base – To rely on just one or two sources of income is to make you vulnerable to external shocks. Diversification means securing funds from as wide a base as possible: membership, donations, sales, the local community, national and local government, project and institutional funding, etc.

Unrestricted funds – Funds that are received for a specific purpose are known as ‘restricted funds’: one is legally obliged to use them for the purposes that were agreed with the donor. In contrast, unrestricted funds can be used for anything that helps you to achieve your mission. The more unrestricted funds you have, the more freedom of action you have …. to choose and change the projects that you want to run or to cover costs that donors are reluctant to fund, like core costs.

Financial reserves – Reserves are financial resources that an organisation holds back to meet unexpected events in the future. These are sometimes kept in a special ‘reserves’ bank account and are shown separately on the annual financial statements. Building up reserves helps reducing the dependence on donors, helps during cash-flow shortages and helps to withstand financial shocks.

Strong stakeholder relationships – The more that you can build up and manage good, positive and strong relationships with your stakeholders, the stronger position you will be in. The key is to develop your relationship with an eye to the future as well as on meeting today’s needs. This means being accountable to your membership, building the confidence of donors, as well as maintaining good relationships with all stakeholders, including related organisations, media, government (insofar possible), etc.

Financing Strategy

All four above conditions require a well-thought out and strong financing strategy. A financing strategy is integral to an organisation’s strategic plan. It sets out how the organisation plans to finance its overall operations to meet its objectives now and in the future. A financing strategy summarises targets, and the actions to be taken over a three to five year period to achieve the targets. It also clearly states key policies which will guide those actions. 

Key Guiding Policies of a Financing Strategy

Reserve policy – what level of reserves you aim to build up, and how will surpluses be handled.

Example: It is our policy to maintain general reserves equivalent to 6 months of expenditure. General fund surpluses in a given year will be added to this reserve.  If the reserve level exceeds the policy level, we will  spend it on behalf of the beneficiaries in line with our strategy.

Core costs policy – what method will be used to recover programme support costs from projects and funders. It will also clarify the policy on subsidising ‘poorer’ projects and how that will be decided and managed.

Example: It is our policy to apportion overhead costs to projects on a monthly basis, in proportion to the direct costs incurred by each project. Each project should generate enough income to cover both its direct and apportioned indirect costs, unless the Board authorises otherwise for particular cases.

Pricing and cost recovery policy – where charges are to be made to service users, this will explain the basis and formula used for the charging, and the pricing structure.

Example: It is our policy to charge users of the clinic for consultation and medication. The basis for the charge is cost plus 10% to cover overhead. Patients unable to pay may apply to our 'Special Scheme' for assistance.

Ethical policy – this will explain who the organisation will or will not accept funds from.

Example: It is our policy to consider the ethical nature of all funds offered to us before accepting. For example, we will not accept funds derived from any illegal source, or from corporates engaged in child labour.  We will not accept funds that create a conflict of interest. 

All this (and more still) is depicted in this tree of life. Thanks to Mango (www.mango.org.uk)!