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South Yorkshire Funding Advice Bureau
I N F O R M A T I O N   S H E E T S

Financial Planning for Fundraising

• What is a Business Plan?
• Project Costing
• Unit costs
• Value for Money
• Added Value
• Cash Flow
• Some Other Financial Considerations
• Useful books

Funding for voluntary organisations and groups has undergone major changes. Core funding is on the decline whilst project or service-specific funding has increased. Funders will rarely now say 'We like your organisation and your work - keep it up and we will continue to fund you.' Instead they will look at the services you provide and decide which to support or buy; your organisation is the vehicle for service provision. This shift is expressed in many ways - 'contracting'; 'service level agreements'; 'the purchaser/provider split'; 'project finance'; or 'outcome funding'.

What this means is that we have to be more sophisticated and creative in drawing up budgets and funding proposals. It doesn't mean the end of our organisations. It just means having to plan our finances in different ways in order to attract funding for pieces of work whilst ensuring that it also supports our core organisational running costs.

In this sheet we will look at some particular aspects of financial planning which funders are increasingly asking for: business plans; project costing and unit costs.

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What is a Business Plan?

A business plan is a statement of what you are proposing to do over a period of 2 to 3 years, how much money will be needed, when it will be needed, and where it will come from. The core of your business plan will be a forecast of income and expenditure for that period of time.

Although it is easier for a small group of people to draft a business plan, it is essential that your whole group approves the final version. It can take quite a while to do it - months rather than weeks.

Try to keep it as concise and short as possible and avoid jargon.

The process of formulating a business plan can be a positive experience for your organisation because it can:

• Help focus on what you are actually doing.
  
  
• Stimulate creative thinking by involving lots of people and seeking their opinions.
  
  
• Challenge assumptions that you are, or are not, meeting your wider aims and objectives.
  
  
• Help identify any areas of weakness in your organisation.
  
  
• Identify what is holding you back - whether is a shortage of people or time, or insufficient funding.
  
  
• Establish a list of priorities for your group.
  
  
• Help to develop action plans.
  
  
• Help you recognise opportunities that you were not aware of before.
  
  
• Provide a means of monitoring and evaluating the progress of your group.
  
  
• Help to avoid crisis management.

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The business planning process:

There is no one particular way to go about business planning, but you should set sufficient time aside for all interested parties to take stock and reach agreement over where you are now before moving on to considering where you want to be in a year or two's time.

To do this you could use a technique known as a 'SWOT Analysis' - this stands for identifying your organisation's Strengths, Weaknesses, Opportunities, and Threats. Once you have agreed on these four areas you can then set clear objectives for the future, agree priorities, and devise an action plan which spells out how you are going to get there.

You need to allow time for drafting and redrafting the plan.

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What does a business plan look like?

There is no one model for the perfect business plan, but it could include the following:

• A very brief statement of your aims (often called a 'mission' statement).
  
  
• A description of your organisation, its history, and its achievements.
  
  
• A list of the services you offer now, and what makes them good and distinctive, and the services you are planning to offer. This should include a discussion of the 'competition'.
  
  
• An 'operational' plan detailing how things are done and what resources are and will be used, such as premises, equipment, your committee and staffing structures, recruitment and training procedures, how you comply with the law on issues such as health and safety and equal opportunities, your complaints procedure and purchasing policy.
  
  
• Details of your finances, including a balance sheet and financial forecasts for two years.
  
  
• An outline of how you will monitor the progress of the project.
  
  
• A marketing plan. This is the key part of the whole document, establishing what your users want, whether they will pay you and, if so, how much. You need to consider the service you offer - who are your users and do they still want what you offer? You may find that you are offering your service in the way you do, simply because that is the way you have always done it. Needs and ways of delivering services will change over time. You need to reconsider your services - should you be offering new ones; are you the best people to be doing it? You need to work out what you should charge for your services or products. Charges should be based on how much it costs to provide that particular thing. Do not forget to include those 'invisible' costs like staff time in the calculation.

Finally, you need to sort out how to promote your services. You need to match your message to your market. Organisations in the voluntary sector are in far greater danger of under-selling themselves than of over-selling themselves.

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Project Costing

First of all, think about the work you want to do and convert it into project ideas, that is discrete pieces of work, and then devise a budget incorporating a contribution towards your group's overheads.

The budget process:

step 1.

Describe your project and what you intend to do with the money in detail.

step 2.

Make a list of all the items you will need to pay for. Think through any 'hidden' costs. Do you need insurance, volunteer expenses, transport? If possible talk to others who have done similar things and find out how much it cost them. Do you need more people, time or space? What will you do if extra items are needed along the way?

You may want to include an allocation of overheads or a contribution to your organisation's central administrative costs, see below for how to apportion such costs.

step 3

Put a price by each item. Do not guess at costs. Be as realistic and current as possible.

step 4.

Once you are happy with your list and the costings, add them up. The total is your total budget for the project. Does it look right? Is it a lot less or more than you expected? If you need to increase or decrease the total cost, look at the items which are flexible like management or administration time or any appointment of overheads. Check all your costings again and double check that you haven't missed anything.

Do you feel that the total amount you need is too much for one particular funder to support? If so, you can approach several funders. You could try to break down the project into smaller chunks or mini-projects and ask different funders for money for the different chunks.

step 5.

Once you are happy with the budget, agree it within your group.

There are a number of issues to bear in mind if you approach your fundraising in this way:

• Your budget will have to reflect your 'project thinking' and shift away from a core budget to 'cost' or 'project' centres.
  
  
• When including an allocation of general costs or overheads into your project, make sure that allocation is made on a sensible and realistic basis which can be explained. Do not just pluck figures out of the air. For instance, if the project represents 20% of your total staff time then it would be reasonable to expect it to pay 20% of the rent and other running costs.
  
  
• In costing each project you need to include one-off start up and capital costs and then divide your other costs into 3 categories - 'direct', 'shared', and 'indirect'.
  
  
• 'Direct' costs are those that apply exclusively to the project, such as salaries and recruitment costs.
  
  
• 'Shared' costs are those which will be shared out proportionately between a number of different projects, like rent and cleaning.
  
  
• 'Indirect' costs are those which are incurred by the organisation as a whole and may include such items as insurance, audit fees, and management committee expenses. As with 'shared' costs these can be worked out on a percentage basis.
  
  
• If you already receive some core income from another source then that could cover your general costs so that you need only approach new funders for the interesting bits.

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Unit costs:

You may hear funders or others using the term 'costing' or 'unit cost' - especially where contracts are being developed for the delivery of services - and you may want to look at using this as a method for costing your activities. Statutory funders sometimes require you to cost your work like this - most charitable funders do not. However, you might want to be able to say how much each person helped (or whatever your activity is) costs in order to make your activity appeal to a particular funder e.g.. 'for every £x you give us, we can help y people'.

This can be a complex process and involves the whole organisation and all its costs so you may need advice to develop your own systems. Basically a unit cost is the cost of a particular piece of work, activity or service. For example if the total cost of taking 5 people on holiday for a week is £500 then the unit cost per person is £100.

A simple example of a Unit Cost:

Taking the same organisation and budget as before, if a funder wanted to pay for the service on a sessional basis they might want to know how many sessions they could pay for with a given sum of money.

To pay for the disability project then, assuming the Centre is open 50 weeks of the year the total number of sessions would be 250.

If 250 sessions cost £16,000; one session costs £64 (16,000 divided by 250).

So, in this case the unit cost for a session is £64.

The disability project needs 50 sessions a year; a total cost of £3,200 per year (50 x 64).

This is a very simple example but as you can see a unit cost is simply a different way of looking at costings.

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Value for Money

Increasingly you will have to prove to funders that your project costs represent 'value for money'. This means asking yourselves 3 questions:

• Is the project economic? How do your costs compare with those of other organisations running similar projects?
  
  
• Is the project efficient? Could you do more for the same amount or by doing more could you reduce the unit costs?
  
  
• Is the project effective? Will it make a difference? What are the likely outcomes?

You can use a value for money argument to support your case.

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Added Value

This is another way of arguing that your project represents 'value for money'. Added value means that for every pound the funder puts in you will input other things that will increase the value of their investment. The sorts of things that you can argue are your added value inputs are your knowledge and skills, your management capabilities, volunteers' time and skills. If your organisation didn't already exist to run the proposed project, then to set the project up from scratch would cost far more money, so you can use an added value argument to support your case.

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Cash Flow

Once you have decided how much you plan to spend, how much you need to raise, and managed to do so successfully, you can balance your budget. But in reality things may not work that way.

Money is not received and spent all at the same time. Grants may come in as quarterly payments or might arrive late but you might not be able to delay payments such as wages or the phone bill. This causes 'cash flow' problems.

You need to know when you will receive money so that you can plan your expenditure accordingly and take whatever actions seem most appropriate. For instance, you could delay building works, or negotiate a bridging loan from your bank, or get a supporter to guarantee your overdraft.

To work out your cash position you need to draw up a cash flow budget. This looks at each item of expenditure and income and shows when the money will be received and when it will have to be paid out. You should look at this each month, or at least once a quarter.

Below is an example of a cash flow budget for a particular item of expenditure:

You can follow the same procedure for every item of expenditure, and then repeat it for your income budget. Keep track of the receipt of each item of your projected income over a period of time and you can then see how it matches up with your expected expenditure. This is called a 'cash flow analysis', and the point of doing it is to get advance warning of any problems so that you can take action to avoid them.

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Some Other Financial Considerations:

• When drawing up your budget for running costs, don't forget to allow for inflation, that is, price rises in years 2 and onwards. You may need to seek advice on projected levels of inflation.
  
  
• When drawing up your budget for capital items, don't forget to allow for depreciation, that is, things like equipment wearing out and losing its value.
  
  
• Some funders, like the European Social Fund, will only make grants if you can find 'matched funding', that is, for every £ they put in, you have to show that you can match it with another £. It may be that you can find this matching money from within your own resources, or you may have to raise it from another funding source.

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Useful books:

Complete Guide to Business & Strategic Planning by Alan Lawrie, 1994

Getting Ready for Contracts by Sandy Adirondack & Richard Mcfarlane, 1993

Both published by:
Directory of Social Change
24 Stephenson Way
London NW1 2DP
Tel: 020 7209 5151

Who Pays for Core Costs? by Julia Unwin, 1999. Published by:
AVECO
130 College Road
Harrow HA1 1BQ
Tel: 020 8424 2334

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April 1998

See also (each sheet will open in a new window):

• Budgets and Costings
  
  
• Developing a Fundraising Strategy
  
  
• Match Funding

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South Yorkshire Funding Advice Bureau
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