When fundraising is not enough generating commercial income

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1 Articles This article explains what commercial income is, and introduces a systematic approach to help you decide whether developing commercial income streams is right for your organisation. Live Theatre s Broad Chare Pub When fundraising is not enough generating commercial income With funding and fundraising coming under increasing pressure, organisations are looking to raise money in new ways, and for many this means generating income through commercial activities. It s an attractive proposition additional money with no strings but what should you be considering before taking the plunge? And how might going down this route impact on the organisation and what you do? What is commercial income? Commercial income is earned by selling goods or services, as against philanthropic income, which is a gift even though that gift may come with terms and conditions attached. Page 1

2 Apart from replacing funding from other sources, commercial income is a potentially attractive for two reasons: It s unrestricted the money can be used for any purpose, as against much philanthropic income where gifts are given for a defined project or purpose. It s generally regarded as being more within an organisation s control to generate that is, it s not dependent on funders who can change their priorities, time-limits for funding, or other factors which you can t control. Is commercial income right for you? The context within which you can explore commercial income generation is defined by four key factors: 1. Your values 2. Your existing assets 3. Your available financial investment 4. Your current culture and competencies Page 2

3 Some of these factors, such as existing assets, are fixed, and there are likely to be absolute constraints on financial investment. Some are, to an extent, choices you can make the values that commercial income generation needs to support, and the amount you are willing to invest. Some can be changed or developed you can agree to adapt your culture and develop competencies to support commercial income generation. The point where these four factors overlap defines the space you can work in your financial potential for commercial income generation. To maximise that financial potential you need to maximise the overlap. Though if other issues are more important than money such as return on mission you may choose to operate in a smaller area of overlap. Let s look at each factor in more detail. 1. Values When public or not-for-profit organisations, or social enterprises, look to generate commercial income it s to increase the resource available money in this case to support their work and further their mission. This makes values particularly important both the values of your organisation as a whole and any values you may adopt in relation to income generation. You need to make sure that what you do will have a positive impact on your mission and will not negatively affect your reputation. At the most basic level, you re not going to want to do anything that conflicts with the organisation s overall mission and purpose no matter how lucrative an opportunity might be, and how much other work could be supported from its profits. But do you want any activities you undertake to generate commercial income to positively further the mission beyond making a financial contribution towards it? Or are you willing to consider activities that have no link to the mission? The choice you make here is likely to affect the amount of profit you require an activity to generate. If the prime reason for the activity is to deliver profit to fund other work, you need to make sure it does so at a level that makes it worthwhile. On the other hand, if the activity will also be directly contributing to your mission, then you might be comfortable with a lower financial return. Page 3

4 Live Theatre in Newcastle has a range of initiatives to generate commercial income, including a gastro pub and an online course for aspiring playwrights. The course generates a relatively small profit, but also contributes to their mission of supporting new writing. The gastro pub is much less closely aligned with the mission, but generates a much larger profit. Sometimes there are trade-offs and choices you have to make, between the potential financial and non-financial impact impacts of an activity. Imagine you re considering an activity that you think may result in negative feedback from one of your stakeholder groups. The more you need the income the more important the financial consideration is likely to be. So, you might be more willing to go ahead and risk upsetting the stakeholders if the alternative is significant service cuts, whereas you might choose to shelve the idea if it s a question of adding nice to have service offerings. The greater the amount of income, the more you may be willing to make the trade-offs. You may judge that negative feedback would not be worth risking for an income of 10,000, but would be for an income of 100,000. This is not to say that there are no absolutes, nor that you should do anything if the need or the amount is great enough, but rather that these are important factors to take into account. 2. Assets Assets are the things your organisation owns or has use of that can potentially be used to generate commercial income. They can be tangible buildings, land, equipment, etc. or intangible skills, knowledge, intellectual property, brand, etc. You can of course acquire or build assets over time, but you start with the assets you already have. Tangible assets are easy to identify. Do you have space, facilities or equipment that people would pay to use when you don t need them? For example, we recently spoke with a charity that runs filmmaking workshops with young people, which hires out its specialist equipment when the young people aren t using it. Do you have underused space that other people would pay to hire, or that you could use to house something like a shop or café? Or do you currently provide facilities for free that people might be prepared to pay for? We ve recently done some research with a number of National Parks, many of which have found that charging for facilities such as car parks, campsites and toilets has brought them worthwhile income. Page 4

5 It can sometimes be harder to work out what your intangible assets might be. Brand is one that s common to many established organisations. If your brand is sufficiently well known, you might be able to sell products or services through their association with it. Or other organisations might be prepared to license the brand from you. For example, the National Trust sells branded products through its shops. Think also about how you might generate income from the knowledge and skills of staff. Could you turn that expertise into sellable products? Do you have services consulting, training, conference organisation, advice that others would be interested to buy? For example, we helped the RSPCA to develop a consultancy service providing advice to the film industry on working with animals safely and humanely. If you re thinking about using staff to provide services on a commercial basis then it s important to make sure the balance of mission and money that it delivers really does have a positive impact for your organisation. A wildlife charity has started using its staff to deliver paid-for consultancy. That work is bringing in money, but it also means that the staff are being taken away from their essential day jobs. The charity is now asking whether consultancy is actually worth the income that results from it. 3. Financial Investment Generating commercial income requires financial investment, which means the activities you re able to explore will necessarily depend on the amount your organisation is able and willing to put in. Your organisation will have constraints on the amount they can to invest, whether it s through the annual budget, or with your trustees permission from reserves. You might be able to access a seed-funding grant or borrow money, but unless you have a track record, this unlikely to be for substantial amounts. Page 5

6 Achieving a positive financial return will in many cases take time. This means a new activity may be a net cost to your organisation over one or more financial years before it results in a net profit. You must be clear about the timescale for you to reach profitability on any activity, and then make sure that your organisation is willing to invest over that period. Initiatives with the potential to achieve high levels of absolute return are likely to require proportionally higher levels of initial investment. Much as we d all like to find an opportunity that could bring in 1M of income for only 10,000 of investment, the reality is that s very unlikely to happen. This of course increases the risk element. There will always be a degree of risk you may lose some or all or what you invest. So it s important you manage that risk. Part of that is about good planning and management, and having enough resource to see it through. You also need to consider how you can minimise your initial exposure. For example, run a pilot of the activity to check its viability. That way you limit your initial investment and can find out what works and what doesn t before you decide whether to invest more. And finally there are other costs to take into account when you re weighing up your investment, both financial and non-financial. From a financial perspective, what return could you achieve by investing in a different activity or leaving the money in the bank or on the money market? And thinking about the non-financial impact, what mission-driven work could be delivered if the money was invested there rather than in a commercial activity? 4. Culture & Competence The culture of an organisation is often summed up as how we do things round here. People s beliefs, behaviours, and expectations are all part of an organisation s culture. How receptive is your culture to charging for services or goods? Will activities that generate income be seen as a valuable part of the organisation s overall work, or as a distraction from the real work? What is the organisational attitude towards innovation and risk? The competencies of your organisation are the extent to which it has the skills, knowledge and experience needed to be successful at generating commercial income. These fall into two types general and specific. Page 6

7 General competencies apply to commercial activities overall. For example, do you understand how to deliver good customer care to paying customers? Do you know how to fully cost an activity, or to calculate its net present value? Is your finance team set up for handling VAT? Specific competencies are those that you need for the particular activity you re considering. If you re looking at opening a public café in your building, do you know anything about running a food and drink operation? Or if you re looking at licencing your brand, do you have the right financial, legal and negotiation skills? When you re identifying the competencies you need and what you have, it s important to avoid the trap of unconscious incompetence. When we re unfamiliar with an area of work, often we don t know what we don t know. It s easy to underestimate what s needed to be successful. Both culture and competence can be built and changed over time. But, as with assets, you start with those you already have and you need to have a plan for how you will move from what you have to what you ll need. Where you don t have particular competences, you have three broad options to acquire them: Grow develop the skills in existing staff through planned learning and development Rent bring in consultants or contractors with the specific skills you need. This can be an interim measure that helps you to explore an activity before committing to having the required skills in-house, or to make progress while you develop in-house skills Buy hire new staff who already have the skills you need. continues over the page Page 7

8 How else can we help? =mc has helped develop commercial income generating activities for a wide range of organisations, including the RSPCA, NSPCC, and a number of local authorities and public bodies. If you d like to discuss a specific idea you have for generating commercial income, explore what the commercial options might be for your organisation, or have training in areas such a Commercial Awareness or Innovation, contact Bernard Ross, =mc Director on +44(0) or b.ross@managementcentre.co.uk. Visit our website to find out more about =mc s training programme on Developing Commerical Awareness and to view the Commercial Awareness Prezi. Page 8