Understanding financing challenges in NGOs
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The document discusses the challenges and limitations NGOs face with traditional project grants, emphasizing the need for long-term funding, capacity building, and diversified revenue sources such as self-financing. It outlines the benefits of self-financing, including increased independence and improved organizational capabilities, while also highlighting potential conflicts with non-profit missions and management challenges. The text suggests that NGOs need to better understand self-financing options and assess their capacity before pursuing these avenues.
Understanding financing challenges in NGOs
- 1. Understanding self-financing in NGOs
- 2. Different grant programs and grant giving institutions are one of the main funding source for NGOs. This form of project support must continue and be increased but it also has number of limitations.
- 3. Possible limitations of traditional project grants
- 4. Inappropriate project periods The periods set for projects are often artificial, they are usually set when a grant programme is drawn up and do not necessarily reflect a project’s needs. The commitment of project funds is often too short to allow long-term planning and development. NGOs require long-term funding to address most social or environmental issues, but there is a dearth of donors willing to commit to periods longer than three years.
- 5. Limited advice and support Due to the often large volume of grants awarded by a donor, the responsible staff have little time to assist the NGO with reporting and advice. While this separation might be desirable to prevent interference in the NGO’s internal decisions, there is a lost opportunity to use the grant for capacity building. A lack of face-to-face cooperation also leads to the substitution of complex forms and reporting to measure results.
- 6. Set themes and priorities The donor usually sets programme priorities and topics, though possibly with research or advice from the NGO or independent experts. These priorities are prone to sudden shifts. With the limited options available to them, NGOs sometimes resort to applying for projects outside their planned activities or mission.The fear is that in the pursuit of funds, NGOs become less driven by demand or need and may lose their relevance to the society they seek to support or represent.
- 7. Negative competition effects NGOs - in competition with their peers for limited resources - can be driven to promise too many activities and set unrealistic goals for the amount of funding. The competitive element also favours the more developed NGOs, as they can prepare better proposals. This may leave new or inexperienced groups at a serious disadvantage, and cause donors to lose opportunities to build the sector. Counter-intuitively, successful NGOs can find themselves at a disadvantage . If a donor perceives them as having sufficient funds from other sources, or as no longer being innovative they may then stop supporting them.
- 8. Reporting pressure There is a trend by donors to measure the results of project grants in greater detail. While it is important for NGOs to reflect on and explain how they have used funds, it is common for the required justification to be disproportionate to the amount received. Often heavy reporting requirements are a substitute for effective involvement from the donor. The completeness and professionalism of the report itself, whether narrative or financial, may become the measure of project success rather than the activities actually done in a project.
- 9. Expenditure contraints Donors often desire to see results only in the defined project activity and as such they forbid or limit the use of funds for organisational overheads, administration or development. Therefore NGOs have difficulty in finding resources for these essential costs. In some instances donors require co-financing from the NGO, with the result that the larger the project, the larger the stress on the organisation to find or prove the co-financing.
- 10. Limited number of instruments Project grants are simply too unwieldy to cover all the funding requirements of NGOs. NGOs need funds at various times and for various uses, particularly overhead costs.NGOs that have attempted to start self-financing ventures also suffer a lack of start-up or expansion capital as traditional grant-makers do not see these as being within the realm of their project proposals, while mainstream financiers consider them too high-risk and low-return.
- 11. Low organizational capacity building By their very nature - and not unreasonably - many project grants focus on project output rather than general organisational development. Additional activities such as training can be viewed by donors and NGOs alike as taking funds from programme activities. The value added by capacity building is usually harder to measure and therefore tends to enjoy less support .
- 12. To deal with these limitations and stimulate diversification of financial resources it is first important to reach a better understanding of what options exist and what self-financing means.
- 13. Self-financing can be defined as the procurement of revenue by internal entrepreneurial methods - in other words, strategies used by NGOs to generate some of their own resources to further their mission.
- 14. Common self-financing methods and strategies in NGOs
- 15. Membership fees
- 17. Product sales
- 18. Use of hard assets e.g. equipment rental
- 19. Use of soft assets e.g. patents, copyrights
- 23. Increased income Obvious... additional financing activities increase income and contribute to the stability of the organization’s monetary situation.
- 24. Diversified revenue base Diversity leads to a stronger position against changes among funding sources and consequences of changing policies. Dependence on donations can be reduced.
- 25. Better capabilities and competences NGOs can learn from using business skills and, through this, improve their organizational capability in planning, management and efficiency. This may result in advanced financial discipline. Increased liberty in decisions on using and distributing revenue is another benefit.
- 26. Contribution to image and visibility Funding institutions appreciate successful NGOs that are self-sustaining and mission driven.
- 28. Identity A lternative self-financing means and business ventures can lead to conflict between profit goals and nonprofit mission. The degree to which a self-financing venture supports the NGO mission is a crucial question and may result in considerable soul searching. Within the organisation there may be resistance to perceived risk and uncertainty regarding a self-financing venture. Self-financing may not be suitable for all NGOs. Criteria identifying potential success at self-financing require investigation. In addition, if an NGO begins charging or operating for a profi t then it may result in a negative public perception of the NG O.
- 29. Organizational capacity The style of management required for a self-financing venture may simply not be present in the existing NGO structure. Lack of real experience or skill in financial performance and human resource management represents a major concern for NGO development. Does the NGO have in-house abilities to manage the self-financing venture or can it develop them? An analysis of the required management skills and organisational capacities should be one of the first reality checks that the NGO takes before progressing down the self-financing path.
- 30. Capital and financing Another stumbling block is availability of funds or start-up capital , credit. Few commercial or philanthropic sources provide financing for NGO self-financing. Nor does the current traditional grant-making approach to NGO funding lend itself to the development of self-financing initiatives. Furthermore, NGOs do not have access to regular sources of capital. This represents a major impediment to launching and developing a self-financing venture .
- 31. External environment When an NGO enters the for-profit sector it becomes as vulnerable as other businesses to the usual challenges of business management and development (including unfamiliar issues of marketing, competition, pricing and market vulnerability). On the legal side it may have to revise articles of incorporation, address unclear or difficult reporting requirements (notably around taxation issues) and problems of distribution and reporting of income and profit.
- 32. I am indeed rich, since my income is superior to my expense, and my expense is equal to my wishes. (Edward Gibbon) The real measure of your wealth is how much you'd be worth if you lost all your money. (Author unknown)
- 33. This project has been funded with support from the European Union. This presentation reflects the views only of the author, and the European Commission and cannot be held responsible for any use which may made of information contained therein.