Case Studies: How to raise Funds through Business Enterprise

funding governance donors financial management
Tuesday, 16 November, 2004 - 14:21

The following case studies have been researched and written up by Fazila Farouk to inform the discussion at the 5th International Workshop on Resource Mobilisation on nonprofit business enterprise. E

 

The following case studies have been researched and written up by Fazila Farouk to inform the discussion at the 5th International Workshop on Resource Mobilisation on non-profit business enterprise. Each case demonstrates diversity in organisational scope, scale and needs. Despite the varied nature of the strategies, it is interesting to note that there are some striking similarities in each of these organisations that have been critical to their success.
Case Study 1

PROJECT LITERACY

Sustainability Despite Cuts in Donor Funding
 

A sad legacy of apartheid South Africa (SA) is the low levels of adult literacy amongst the black population that is the result of an inferior school system that was deliberately designed to defeat the true ends of education. Project Literacy (PL) is a non-profit organisation (NPO) that has devoted thirty years to eliminating this scourge in disadvantaged communities. Its work has spanned two radically different eras, which have made substantially different sustainability demands on the organisation. Yet, it continues to forge ahead on the strength of a turn around strategy that has seen the organisation go from being 100% donor funded to becoming 88% self-financing over a period of eight years.
 
A Democracy That Posed Problems to Sustainability but Opened Opportunities to Overcome Them

The arrival of democracy saw the re-routing of donor funding to a newly legitimate democratic government that everyone from the international community to local interest groups were keen to support. PL like many other NPOs found themselves faced with a sustainability crisis. The non-profit donor funding pool had shrunk overnight.
 

However, other implications of this transition to democracy can also be considered as critical to the success of PL’s sustainability strategy. The democratic government immediately recognised the need to develop the skills of the illiterate masses and developed a comprehensive and diverse outreach programme targeted at both employed and unemployed South Africans. Under the new dispensation, skills are being developed through training authorities that span various sectors, viz., sector education training authorities (SETAS) such as the mining SETA, for example.
PL’s strategy was to reach its target group through the SETAS. This approach has not only strengthened its mission but also brought significant amounts of new money into the organisation.
 
The Turn Around Strategy

The turn around strategy entailed building the capacity of the organisation to tender for government contracts to raise the literacy levels of poor workers and unemployed people. For example, PL is currently teaching basic maths and science to 4,000 unemployed people through the chemical SETA. Beneficiaries of the programme are identified through community based projects.
 

Building the organisation’s capacity to deal with this shift from a direct delivery NPO to a service delivery NPO demanded a concerted effort. As a primary priority, PL prepared itself to become a service delivery organisation by seeking and gaining the appropriate accreditation to run large government training programmes. This required complex changes at various levels to meet regulatory requirements and included overhauling the organisation’s financial management department, reviewing its staff and associated skills base and introducing new management practises and operational frameworks.
 
PL set itself the target of expanding its income generation programme at an annual rate of 20%. The organisation has been highly successful in meeting this target. PL currently manages an annual budget in the region of 55 million Rand, i.e., roughly eight million American dollars. It has a staff complement of 83 people and operates nine offices nationally, one each of the country’s provinces. PL’s head office is located close to the seat of state authority in the capital city of Pretoria.
 
It Takes Money to Make Money

One of the more salient points raised by PL’s chief executive officer (CEO) Andrew Miller, is that “the financial management department is the last place that NPOs put money”. However, investing money into building a project based financial management system was at the core of PL’s successful strategy. Not only was a great deal of money invested into improving and expanding the PL’s financial management department, but the organisation also actively engaged the services of people with financial skills for its board of directors. Many of PL’s directors are merchant bankers.

Moreover, it is widely acknowledged that NPOs are reticent in marketing their achievements. PL astutely avoided this error by bravely venturing into this area that is largely derided by the non-profit sector. It appointed a national marketer and all it’s provincial managers went on a presentation and marketing course. The result is an NPO with a slick and professional image that is able to secure huge government contracts, which would otherwise have gone to the corporate sector.

Registration and Tax Implications

Due to the fact that PL is recognised by the receiver of revenue as a public benefit organisation and more importantly due to the fact that its income generating activities promote its mission, PL is exempted from paying any income tax.
 

PL is a registered non-profit Section 21 Company as well as a trust. It is interesting to note that PL’s trustees, who come from a social and development background provide a healthy counterbalance to the cautious fiscal controls of the board of directors. In this way, the organisation is able to adhere to its altruistic values, while remaining reliably sound at a financial level.
 
Critical Factors For Success
  • Strong leadership
    The organisations CEO is credited with having the entrepreneurial vision for its turn around strategy, which has grown from strength to strength under his supervision.
  • Strong financial management
    PL costs every piece of work in advance and pre-bills clients. Clients are expected to pay a percentage of their fee up front providing valuable cash flow to the organisation.
  • Strong marketing plan
    Through its marketing drive, PL made a special point of highlighting the fact that NPOs can provide a professional service that is comparable to the corporate sector while still upholding their philanthropic principles.
  • Introducing staff incentives
    PL shifted to a performance-based bonus remuneration package and this improved the staff’s fulfillment of their roles and responsibilities.
Case Study 2

THE PSYCHIATRIC AFTERCARE HAVEN

Mutually Reinforcing Patient Rehabilitation and Financial Sustainability Strategies

A common oversight society makes is to view psychiatric patients as social pariahs that are unable to be productive citizens of this world. Through an enterprising initiative, the Psychiatric Aftercare Haven (PACH) challenges this notion by using the therapeutic rehabilitation of its patients as an integral part of it’s financial sustainability strategy.

PACH has set up a few mainstream businesses as part of a mutually reinforcing sustainability strategy and patient rehabilitation programme. PACH runs a café, tea garden, a catering service and craft shops as part of its income generation strategy. Patients work in these businesses as a compulsory requirement of their occupational therapy. They also fill some of the haven’s less demanding personnel positions, for example, PACH’s receptionist is a psychiatric patient.

The businesses have been enormously successful, for example, the PACH café generates an annual profit in the region of 300,000 Rand --- money that is ploughed straight back into the operations of the organisation.

An Entrepreneurial Success with a Humble Beginning

Based in the coastal city of Port Elizabeth in the Province of the Eastern Cape, a region that is widely considered to be one of the most economically depressed parts of South Africa (SA), PACH arose as the result of a volunteer initiative in 1986. It has its roots in the state run Elizabeth Donkin Hospital where a group of warm hearted women from the surrounding community called the “The Friends of the Elizabeth Donkin Hospital” had been volunteering their services since 1979 raising money to brighten up patient’s rooms, amongst other things.

While the social worker responsible for the patients at the time, John C. Meyer (PACH’s current director), appreciated the philanthropic endeavours of these sympathetic souls, he was really concerned that too little was being done about psychiatric patient’s re-integration into society. So he rallied the volunteers around the idea of setting up a half way house to provide occupational therapy for discharged patients.

In 1986 with the help of a tiny donation of five hundred Rand and the assistance of three volunteers, John hired an old nunnery and the haven was launched with a tea party, hosted by the city’s mayor. The party was an enormous success as the mayor and his wife attracted a fair deal of media and community interest. Money and various other items were donated at this event and surplus donations such as duplicate pieces of furniture were later auctioned increasing the cash revenues of the haven. From these humble beginnings, the haven limped along for two years with the help of a few volunteers.

However, in 1988, in a collaborative initiative with the “Co-workers of Mother Theresa”, John and a few volunteers arranged the late Mother Theresa’s only visit to SA. This was organised to coincide with PACH’s official opening. Again, this translated into a profitable public relations exercise. PACH was featured on television news generating an enormous amount of public support. The rest as they say is history.

PACH now comprises two centres that provide a 24 hour service and employs 26 full time staff that cater for the needs of 74 patients. The humble five hundred Rand donation kick-started a chain of events that has increased the organisation’s annual budget to three million Rand. Several income streams support this budget.

An Income Generation Strategy Supported by a Diverse Sustainability Strategy

Business Enterprise for Non-Profit Purposes. PACH’s successful business initiatives have led to plans for further enterprise expansion. An old hotel has been purchased and is being refurbished to provide office accommodation and host an upmarket restaurant for the legal fraternity from the nearby supreme court precinct.

Corporate Donations

Over the years PACH has attracted corporate funding from major social investment programmes. This money is used to fund capital investments, such as the purchase of the old hotel.

Accessing State Grants

PACH’s two homes provide each patient with a private bedroom. The homes have a mixture of private and public patients, the majority being public. Patients that come through the public health care system come with a disability grant, three quarters of which is paid to PACH. It is interesting to note that the provincial health authority was taken to court on three separate occasions by PACH for the delayed disbursement of grants. The organisation was successful with each and every court application and has since not experienced any problems with late payments from the unwieldy authority.

Cross Subsidisation

Public patients are subsidised by private patients. Private patients pay medical aid rates and their beds are not at all subsidised. Still, the haven is able to attract these patients because it has competitively pegged its prices to undercut private hospital rates.

Registration and Tax Implications

PACH is a voluntary association and registered as a welfare and non-profit organisation (NPO) with the Department of Social Development. It is also recognised by the Department of Health as a licensed home under the Mental Health Act of 1973. It is exempted from paying income tax in terms of Section 10(1) (cB0 (i) (bb) of the Revenue Act

PACH has not registered its various business enterprises as separate entities. These enterprises operate out of the existing centres. Thus, due its non-profit status, the only taxes that PACH is liable for are related to staff salaries, as is the case with most NPOs. PACH is also a registered value added tax (VAT) vendor, thus paying VAT on its board and lodge and products sold through its enterprises.

However, managing the finances of these businesses has necessitated establishing a sub accounting system within the overall accounting system of the organisation. This accounting system within an accounting system has been the subject of repeated scrutiny by the people from the revenue services. However, PACH’s meticulous record keeping and its competent financial management system has ensured that it has not fallen foul of the tax man.

Critical Factors For Success

  • Entrepreneurial Insight
    PACH identified an opportunity that expanded its core programme work and increased its income.
  • Intelligent Marketing
    PACH astutely used the celebrity status of local dignitaries and international luminaries to promote the goals of the organisation and attract resources.
  • Dedicated Leadership
    The director is a founding member of the haven and its entrepreneurial leader.
  • Staff Commitment
    Most PACH staff have worked in the organisation for an average of 10 years.
Case Study 3

FAIR TRADE IN TOURISM SOUTH AFRICA

Fee Based Financial Model Builds Income Generating Strategy

 Africa (SA) is a country brimming with natural beauty that until a decade ago was largely unexplored by international tourists. The peaceful transition to democracy reversed this trend. SA’s beauty, its first world infrastructure and cheap labour have positioned the country very competitively in the global tourism arena leading to steady market expansion.

In the tourism industry (much like many other sectors) the pursuit of profit often takes place at the expense of consideration for the natural environment and humanity at large. Fortunately, the information age is increasingly exposing this trait and giving rise to a new kind of tourist --- the discerning tourist that wants the peace of mind that his/her holiday is neither harming the environment nor exacerbating global poverty. Fair Trade in Tourism South Africa (FTTSA) offers this balance to enlightened tourists by endorsing tourism enterprises that exercise fair business practices. Thus, tourism enterprises that satisfy FTTSA’s progressive user criteria pay a fee for the use of its trademark. FTTSA also promotes community based tourism enterprises in an effort to open up their access to niche markets.

FTTSA is a young organisation having emerged in 2001 from a two-year pilot project initiated by the International Union for the Conservation of Nature (IUCN). Under the tutelage of project manager, Jennifer Seif, it has grown from a small IUCN project with a meagre start-up budget of 250,000 Rand to a strong unit with its own organisational identity, a substantial annual of budget of 2,5 million Rand and a staff complement of eight people.

Generating Income to Build a Reserve Fund to Act as a Cushion in Case of Future Crisis

FTTSA’s income generation strategy is not the main focus of its resource mobilisation strategy. Rather, the organisation is an example of a non-profit organisation (NPO) that has developed a good income generating initiative that supports a diverse sustainability plan.

Still, FTTSA’s fee based financial model is at the heart of the organisation’s success. Fees are charged on a sliding scale with smaller and newer enterprises paying less than bigger and better established enterprises. At the moment, fees acquired through FTTSA’s income generation strategy only contribute to about one percent of its overall budget. Nevertheless, Seif believes that trademark users should pay for brand endorsement as a matter of principle. This is also an important indicator of buy-in for the cause.

Fees generated in this manner are invested directly into a reserve fund that was established in 2001. Seif hopes to increase the funds contribution to the organisation’s overall budget to 5% by the end of 2005 and then eventually to between 20-25% over the medium term. This medium term target is roughly 300,000 Rand and is equivalent to three months of overhead and staff costs. This will provide a healthy cushion should the organisation find itself facing a sustainability crisis somewhere down the line.

These are realistic targets that can be attained, as the fund will without doubt grow as increasing numbers of tourist establishments buy into the trademark. In addition, user fees will become more expensive as the brand gains more recognition in the marketplace. Other contributions to the reserve fund include a 50,000 Rand cash injection won in a competition that recognises excellence in resource mobilisation as well as tiny surpluses from other project funds. However, the fees generated from FTTSA’s income generation scheme remain the main source of funding for the reserve fund.

An Income Generation Strategy Supported by Magnificent Marketing and In-Kind Support

FTTSA’s core business is “marketing a brand” and they do it well. Seif has made clever use of the mainstream media to promote the brand and the organisation, thereby attracting further support. For example, at a small cost to the organisation, a leading national weekly newspaper was convinced to produce an eight-page supplement that centred on FTTSA and promoted some of its certified tourist establishments. According to Seif, this was much cheaper than producing a newsletter and it reached a larger volume of people within the right target audience. Additional copies of the supplement were printed at a fractional cost and these are still being used by FTTSA in its outreach programme.

Moreover, in-kind support to the organisation is equivalent to about 20% of its current annual budget. Support ranges from free legal advice to free air tickets. For example, FTTSA recently hosted a stakeholder meeting, which included a guest speaker from the United Kingdom (UK). British Airways flew the guest speaker to SA at no cost to the NPO.

This in-kind support is reinforced by friendly quid pro quo arrangements. Seif believes that strategic exchanges are a valuable part of organisational sustainability. In this way FTTSA is able to build up its “favour bank”. For example, Seif has provided policy advice on responsible tourism to government and industry associations, which in turn help to open doors for FTTSA. According to Seif, NPOs that are struggling to survive usually do not have the luxury to think about strategic exchanges as their energies are or should be consumed by activities that bring hard resources into their organisations. However, once an NPO is sufficiently stable it can start thinking about strategic quid pro quo arrangements.

Registration and Tax Implications

FTTSA is currently still a project of the IUCN, which is recognised as an intergovernmental organisation (IGO) under section 5 of the Diplomatic Immunities and Privileges Act (Act No. 74 of 1989.

However, FTTSA having expanded its budget and staff complement, is currently in the process of registering as an independent non-profit Section 21 Company. It is interesting to note that Seif is not keen to entirely separate out all her organisation’s functions from the IUCN as sharing resources and knowledge with this organisation has substantially reduced FTTSA’s overhead costs. She also argues that the IUCN adds credibility to FTTSA in the public domain. Moreover, it has a good record of financial and human resource management, which FTTSA is reluctant to lose.

Critical Factors for Success

  • Strong leadership
    Seif is responsible for FTTSA’s visionary turn around strategy. Together with her marketing team, she has attracted a great deal of in-kind support for FTTSA.
  • An organisation that embodies the entrepreneurial spirit
    Every single FTTSA staff member routinely behaves in an entrepreneurial manner. For example, if the administrator is registering someone for a conference, she will ask for the fee to be waived or at least get a discount.
  • Understanding the power of marketing
    While many NPOs are reticent about marketing their successes, FTTSA understands all too well what the drivers of the information age are. As a result, it uses every opportunity to put its information into the public domain.
  • A diverse resourcing strategy
    FTTSA’s strategy includes traditional fundraising, partnerships that reduce overhead costs, sourcing in-kind support, charging fees for the use of its Trademark, and employing qualified volunteers from international agencies. This strategy has impressed at least one donor. The UK Department for International Development (DFID) awarded a three-year grant to FTTSA based on a matched funding basis. DFID is matching all the resources mobilised by FTTSA, including the in-kind support, which has been quantified at market related rates.

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