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Giving effectively: can data play a bigger role in decision-making?
It will come as no surprise to anyone reading this article that it can be challenging to decide the best way to help a cause that you believe in. Determining what you want to support is quickly followed by the problem of resource allocation: the questions of where, who and how.
The social sector – charities, social enterprises and community groups – has traditionally been queasy about using metrics to assess, rate and compare organisations. As such, there is often little data to enable this. For philanthropists more familiar with a world of metrics and analysis, this can be a frustrating experience – and may be holding back some from giving.
Things may be beginning to change. Data is more available. A growing cadre of trustees and managers are more interested in data and indicators as they double down on impact. If more analysis is possible, what indicators should we look for if we want to give effectively?
Perhaps the most critical issue to understand when deciding to support an organisation is whether it is viable: are they likely to still be here in five years? Is the operating model inherently riskier or less sustainable? If we can establish whether an organisation is resilient, we can then consider the effectiveness of the organisation’s activities or the impact and effectiveness of philanthropic giving. So, how can data and indicators help us to do this?
How to identify sustainable organisations
The sustainability of an organisation reflects many factors, from the quality of its leadership team to the strength and reach of its relationships. It also includes the merits of its operating model. The Arts Council and the Bechtel Foundation are funders who have explored what resilience looks like in practice, but there remains no single definition of organisational sustainability. As a result, the social sector lacks a set of commonly agreed metrics that we can use to assess sustainability and resilience.
We think this needs to change.
Research by MyCake is now exploring the role of metrics and whether they can help us understand resilience. Using data from a large-scale sample of social sector organisations, we have found the following metrics are particularly beneficial when evaluating operating models:
- Turnover – what is the five-year trend: growth, stasis, decline or volatility? Do trends reflect or differ from the sub-sector the organisation operates in?
- Contribution to reserves (net margin, or profit by another name) – what is the five-year trend? A negative contribution to funds is relatively common, as organisations may be investing in some years. Negative contributions should prompt questions about why (planned or unplanned?) and whether they are likely to continue.
- Working capital or liquid unrestricted net assets (LUNA) – low or negative reserves levels are a warning flag. When looking at reserves levels on the balance sheet, double-check to see whether any bricks and mortar assets are described as restricted or unrestricted: accounting errors are common. For charities, covenants may restrict the sale of buildings, limiting the repayment of any debt. Figures for net current assets are also helpful: a negative amount may indicate the risk of trading insolvently.
- Staff costs – this is commonly the most significant single area of expenditure in an organisation . In our latest research, we’ve demonstrated a correlation between proportionately high staff costs and an increased risk of closure.
- Income concentration – income diversification is a familiar strategic goal in the social sector, albeit with diminishing returns. Organisations with a high proportion of turnover from a single client or single income type are likely to be less resilient. Measuring income concentration gives us an indication of this risk.
Funders and philanthropists may find that these metrics are enough to inform decision making. We think there is room for more detailed analysis and financial benchmarking in the social sector, in contrast to the private sector in the UK and the nonprofit sector in North America. MyCake’s specialist area of expertise is financial benchmarking: we collect and analyse data on over 40 income and expenditure types, alongside a suite of 30 metrics and KPIs. Our research programme aims to refine these and apply them across different places or sub-sectors. We have developed forecasting tools – a risk rating and a resilience rating – which improve the ability of the sector to identify financial fragility and address it before organisations fail.
Understanding how philanthropic funds can make a difference
We have argued that data and metrics can help identify and select organisations that are most likely to be sustainable. The next step for funders and philanthropists might be to understand better how their support contributes to the organisation’s sustainability.
A starting point is to ask how the organisation will use any support. One way of thinking about this might be:
- Capital – money used to buy or refurbish physical assets such as buildings and land or improve it through activities such as setting up energy generation (solar, wind etc.)
- Delivery of services – funding the costs of ongoing activities which sit at the core of the organisation, such as services to a particular community
- Innovation – monies used to undertake research and development that will lead to next-generation solutions and activities
The outcomes of the three purposes are notably different. Supporting the acquisition of capital assets will likely support the delivery of activities and impact over multiple years. However, asset purchase may not translate into more revenue or better outcomes: the organisation may not have the skills or expertise required. The business model for a community café may deliver social impact but little revenue.
A contribution towards the cost of service delivery is likely to have a clear link with outcomes and impact. Further analysis can help understand whether the funds cover current service provision levels or enable extended provision. Both are useful as the demand for services often exceeds the funding available.
Few organisations have the funds available to cover the cost of innovation, just as few can generate the surpluses on regular activity that enable capital purchases: philanthropic support can make a real difference in such cases. The challenge is how to appraise proposals and test the assumptions that underpin the business model. Are suggestions for long term innovations that are high risk and high return? Or tweaks to existing activities which are lower risk but potentially lower return?
Any decision necessitates a fit between the philanthropic interests and what the organisation perceives it needs: mission drift or developing programmes to match the money on offer are a known problem in the social sector. Again, metrics and indicators can help. We can use metrics to evaluate the health of an operating model and the uses to which philanthropic funds could be put in that model. We can establish a sense of what ‘normal’ levels of progress are across a sub-sector, size of organisation or place, and the role of philanthropic funds within those groupings. Financial analysis won’t make a decision about whether philanthropists and funders should support an organisation or a cause. Still, it will help them to understand what value they add and what role they can play.
An increasing role of metrics and indicators
We are seeing an increasing interest in using data, metrics and indicators to understand the social sector: its capacity, financial health and, ultimately, its contribution and impact. The financial analysis traditionally undertaken in other sectors is increasingly being used to inform local and national government strategy. It is also being used to evaluate the impact of public and private grant funders and as an input to operational and business planning in individual organisations. As the sector focuses more on delivering impact, data and metrics are helping all stakeholders to make better decisions.
What is MyCake?
MyCake was founded in 2007 to provide data to support business development consultancy to nonprofits around the area of trading and earned income development. Since then, we’ve built a series of data tools focused on financial data on non-profits that support data-enabled strategic decision making. Our tools and insights are increasingly used to support strategic decisions across the sector by central & local government, grant funding organisations and philanthropists who commit significant funding to achieve specific social and environmental outcomes. To find out more about our suite of key financial metrics and online services, visit www.mycake.org