Is it time to talk about the financial sustainability of CSOs when the country is at war? What indicators can show the real state of organization’s financial health? Where does the development of financial sustainability begin and what might get in the way?
WHAT ARE THE INDICATORS OF FINANCIAL SUSTAINABILITY AND HOW ARE THEY APPLICABLE TO UKRAINIAN CSOs?
According to Viacheslav Bykov, any organization, especially an NGO or charitable organization, has two main resources: time and money.
“Financial sustainability can be replaced with a synonym “capacity”: if an organization has no resources, no tools, no means to carry out its activity, then, accordingly, this activity will not take place. That is, unfortunately, no effect can be achieved by the NGO.”
According to the expert, financial sustainability is defined as the availability of the right resources at the right time at a reasonable price. Accordingly, a so-called gauge for many organization managers may be the answer to the question – are there enough resources?
“There are specific, measurable indicators,” says Mr. Viacheslav. “The only problem is that they are all developed by Western experts, primarily US or British, and applicable primarily to US or British organizations.”
The first reason why such indicators are not applicable is benchmarks, that is, we usually talk about relative indicators.
“One of these indicators is the balance of funds, i.e. cash on hand, and it is determined not by the absolute amount of money, but by how many months of activity this money will cover,” Viacheslav Bykov gives an example. “For example, according to my data, I have 6 months’ worth of expenses, and I am a Ukrainian organization. What does it mean? Is it enough, is it a lot, is it not enough? It is unclear. There are benchmarks for US organizations, and the US benchmarks say it’s generally OK, but it’s better to have 9 months’ worth of expenses. That is, for a US organization, the benchmark is 9 months.”
Such benchmarks among Western partners are determined on the basis of research: which organizations with which average cash balances are considered sustainable. In Ukraine, however, there have been no such studies.
“We can only rely on US indicators, although not all of them are applicable to us. For example, if we talk about the balance of funds, it does not take into account the fact that the organization can be funded through volunteer assistance, that is, it receives many services and works for free. Not with money, but directly, for example, through humanitarian aid, which is then distributed. It seems that there is not enough money, based on the budget, but at the same time it is not necessary.”
Another indicator is target liquidity: an absolute measure of the organization’s financial sustainability. The only problem, according to Mr. Viacheslav, is that this indicator was also developed by US researchers: “The formula takes into account, for example, cash, loans, credit line balances, the fate of non-charitable contributions in income, etc. This indicator shows whether the organization will have enough resources for the coming year with a 95% probability. This is the final answer. But in order to get it, things are actually taken into account which are simply not available to Ukrainian organizations.”
Moreover, Viacheslav Bykov is convinced that financial sustainability cannot be measured based on the implementation or non-implementation of the budget, i.e. the ratio between income and expenses. One of the reasons is that budget implementation does not take provisioning into account. The global approach assumes that every year the organization must raise more than it spends, and thus a provision is made, which then allows, for example, keeping operating funds balance for future periods.
Another problem with indicators is that they are based on certain financial reporting standards. According to the expert, non-profit organizations in Ukraine prepare statements that are required by Ukrainian legislation and, unfortunately, nothing can be calculated based on them.
WHAT PREVENTS UKRAINIAN CSOs FROM DEVELOPING FINANCIAL SUSTAINABILITY?
According to Viacheslav Bykov, the two main obstacles are ignorance of tax legislation and public opinion.
Currently, the tax legislation for charitable organizations is quite “vague”, and there is almost no law enforcement practice on the part of tax authorities: “The problem begins with whether I can get this type of income, whether I can’t get it, and if I get a charitable contribution from a foreign organization, what problems does that create for me?”
Consequently, organizations are afraid to do more than just solicit charitable contributions and spend them entirely on program activities.
As for public opinion, it is primarily a matter of people not understanding the difference between charities, NGOs, and volunteer activities. “For them it’s all conventionally called volunteering,” says Mr. Viacheslav. “According to the general public, it is impossible to work in an NGO. In an NGO, you can only be a volunteer. That is, how is it that you get money for activities in an NGO?”
This becomes a source of problems for the head or financial manager of the CSO: which sources should be used to finance the engagement of experts, the recruitment of qualified workers, where to get resources for competitive salaries?
“Everyone is very happy to, say, finance the purchase of medicines and say: “I want my money to go straight to this child’s medicine,” says Viacheslav Bykov. “But very few people want to finance, for example, the salary of a person who will find these medicines, bring them in compliance with all certification requirements, with the observance of temperature conditions, etc. That is, people do not think about it. And that is why, for example, Taras Chmut more and more often says “Competent Assistance Foundation”, that is, he emphasizes that they are not volunteers, they work professionally in this field.”
To eliminate this problem, Mr. Viacheslav thinks it is necessary to emphasize that NGOs and charitable organizations are non-profit, but the costs of labor and human effort must be compensated.
FIRST STEPS TO THE FINANCIAL SUSTAINABILITY OF CSOs
Viacheslav Bykov identified three main steps that should be taken by a CSO that wants to develop its own financial sustainability.
- It is necessary to determine what the organization does, and say ‘no’ if donor funding does not meet the identified needs.
According to the expert, CSO leaders and the team should understand what the organization is doing, why everyone got together, what they want to change and how. And then, seek funding for this specific decision.
“For some, diversity is important, for some people – the topic of children, while for others – the topic of healthcare in general,” says Mr. Viacheslav, using the example of the activities of the Tabletochki Foundation. “But the below is the same for every organization: some people support, for example, just social movement and activism, while some will support a specific topic, and someone other as a law firm will support some legal aspect.”
- It is important to have a budget for the organization as a whole.
Viacheslav Bykov explains that, in particular, the budgets of several projects or the budget of several programs may be included there, but at the same time there will be general administrative and fundraising parts.
“They very often start out with the income budget, and then the expenditure budget, that is, they look at how much money there is, and then look at what to spend it on. And I always repeat: Start with how much you need, and then look for funding, especially if you are an NGO,” says the expert.
Mr. Viacheslav also advises against being afraid to show donors the entire budget: “Let’s say your budget is 10K, the donor gives a thousand, then show the whole budget so they know that in fact your expenses are higher, that there is more there.”
In addition, donors mostly also like to see that the organization does not depend on them. This gives the donor a lot of freedom in their decision-making, too.
- The more donors you have, the better. If you can get crowdfunding, go for it.
As for crowdfunding, it can be quite difficult at first: “No one knows you yet, you have no name. But maybe you can try it in your city or among the people you know, former employees, etc.”
According to Viacheslav Bykov, this is the most stable source of income: specific people may change, but the total amount is more stable than if it is an international donor. “If one person out of 100 people no longer gives you 100 hryvnias, 99 people still continue doing so. And if you have lost a large donor, then this is exactly the problem.”
In particular, for Ukraine, Mr. Viacheslav suggests the level of diversification as an indicator of financial sustainability: “Say, how many donors account for 1 dollar, or how many dollars account for 1 donor. We can also separate out the share of big donors, that is, what is often called concentration in finance and banking: how much of your income accounts for 1 big donor, or how much of it is taken up by the biggest donor, or the 10 biggest donors. And the lower this indicator, the better.”
Why it’s important to impart knowledge about financial sustainability through mentorship
According to the expert, financial sustainability knowledge should be communicated through all available forms of interaction and communication.
“The financial sustainability of CSOs in Ukraine is something that needs to change, but so far very little is said about it: either at trainings from foreign donors, where they share successful, but not Ukrainian, cases of how the organization raised a loan against the future proceeds from the sale of souvenir products; or at tax trainings for the accountants and financial managers, where they intimidate everyone that any innovation in financial planning will lead to the cancellation of tax non-profitability status and organization liquidation.”
According to Mr. Viacheslav, as a result, we get a prejudice that the changes are too complicated and not relevant for the domestic environment, and what’s more, we will also be punished by the fiscal authorities for them. Therefore, no wonder no changes occur.
“Yes, it is not easy to build a financially sustainable non-profit organization in Ukraine, but there are opportunities for this,” the expert is convinced. “Just because I can’t run a hundred meters in 10 seconds doesn’t mean I won’t get faster and stronger if I train. That is why I encourage training financial capacity, in particular through mentoring – the process of sharing experience.”
In his role as a mentor this year, Viacheslav Bykov worked with the YODA Youth Democratic Association NGO – he supported the mentees as they went through the main initial steps on the way to strengthening financial sustainability.
“We started by going back to the basics – the essence of the organization, its mission, vision, and concept. We identified what resource needs existed and which ones were not being met. The result is enshrined in a concept paper, which will henceforth remind the Board of the necessary resources and the principles of raising them and using them, and will tell potential donors about it, screen out those whose mission, values and approaches will not coincide with the YODA’s vision.”
In addition, under the mentor’s guidance, the mentees put together a general annual budget: “They made it ‘perfect’ in terms of expenditure, that is, what it would be like if resources were unlimited.”
While working with the mentor, the mentees saw the deficit, the need, and possible sources of raising additional funds, which they tried to diversify as much as possible.
According to Mr. Viacheslav, several indicators were finally derived that will serve as a reference point for the financial health of YODA NGO.
“But the main thing is that our colleagues gained experience,” says Viacheslav Bykov. “The experience of the first grant and the first conversations with the donor. The experience of dependence, the experience of dealing with financial institutions that do not understand the concept of nonprofitism at all, the experience of negotiating large budgets and the experience of connecting payment systems.”
According to the mentor, as a result, the “the scary thing that could lead to the loss of non-profit status” for YODA NGO has not become less of a challenge, but has become a support and one with which you can confidently work to achieve socially important results.
The material was prepared by Kseniia Ditchuk
for the Mentorship Program 3.0 implemented as part of the Project Ukraine Civil Society Sectoral Support Activity implemented by the Initiative Center to Support Social Action “Ednannia” in partnership with the Ukrainian Center for Independent Political Research (UCIPR) and Centre for Democracy and Rule of Law (CEDEM) with the sincere support of the American people through United States Agency for International Development.