Non-profits and financial sustainability in South Africa

by Shelagh Gastrow, Founder and Director, GastrowBloch Philanthropies

There are more than 150 000 non-profit organisations registered with the South African Department of Social Development. This explosion of organisations has resulted in on-going pressure for funding. Whilst funding crises are the normal situation for many non-profits, it is important for them to make plans for their long-term sustainability if they wish to roll out long-term programmes, rather than one-day-at-a-time activities.

Donors too are concerned about the viability of the organisations they support as they do not want to make contributions that merely end up keeping an organisation together, rather than running effective programmes.  At the same time, donors increasingly expect fast results which are not always possible in the social sector, and this leads to fragility in organisational funding cycles.

There is a growing trend in the development sector to explore for-profit social entrepreneurship in the belief that the market can solve social problems. Whilst this has certainly created more energy in the small enterprise space that provides services to the poor, systemically there is rarely a market solution to some of the real challenges we face.  In fact, many of our socio-economic problems arise from market failure.

The view that market solutions can solve the world’s problems does not deal with the systemic issues, but rather only measures economic outcomes based on quantifiable results, rather than the qualitative and complex issues relating to our social systems. In addition, many organisations that function in South Africa’s civil society sector are critical to our democracy and have provided much-needed research, policy input and advocacy around a range of systemic social justice issues. The fact is that there will always be organisations that are largely dependent on grants and philanthropy and it is important that our society recognises the value of their roles and makes contributions to their existence.

Most non-profit organisations are currently exploring ways to supplement the donor income they receive, as fundraising has become increasingly difficult in the existing environment.  One way of doing this is through income generation through fees charged for services, but there is frequently confusion about what is permissible in terms of their tax-exempt status.  In South Africa, trading is permissible by NPOs in terms of the existing legislation. If the organisation has reserve funds or banks their grant funding in high interest-bearing accounts from which they can draw down as required, interest is tax exempt.

When it comes to active trading or income generation, this is only tax exempt if directly related to the organisation’s sole object outlined in its founding constitution.  For example, if an organisation focussing on HIV prevention runs HIV and AIDS awareness-raising and training programmes for clients and is paid to do so, that would be tax exempt.  However, if the same organisation decides to establish a biscuit factory, i.e. not aligned with their core business, that would need to be ring-fenced and taxed like any other business. Whilst these non-aligned income-generating projects have had the odd success, they often contribute to substantial mission drift on the part of the non-profit organisation as attention is drawn away from its key purpose towards the money-making entity.

Very often, further investment has to be made into new human resources as the organisation’s staff are not skilled in the requirements of the unrelated business. Like many for-profit start-ups, lots of these businesses fail and the NPO, as owner, has to manage that financial loss.

How then do non-profits ensure their long-term financial viability? This can never be guaranteed even for a for-profit, but some principles should be kept in mind to create a level of resilience that would see an organisation through a bad year. Good financial planning is important so that an organisation can predict what it would need going forward, rather than merely facing an annual crisis.  It is crucial for organisations to be flexible in a fast-changing society, but taking on random projects often drains resources, not only financial, but organisational staff become tied up in projects that are not necessarily a key priority.  A level of forward planning relating to the organisation’s purpose, focussing on key programmes including what these really cost the entity is important. Costs are not just the programme costs, devoid of overheads and staff, but the full cost to the organisation needs to be understood and budgeted.

Another principle is diversity of income. Start-ups often only have one or two donor supporters, but it is imperative that an effort is made to grow this pool.  Diversity is not only about more donors, but ensuring that they come from different sectors such as the corporate sector, private philanthropy, international sources and even government.  At the same time, efforts should be made to develop a reserve fund.  Reserves enable an organisation to be flexible, to survive crises such as the exit of a critical donor, to balance uneven income flows, or to manage a difficult leadership transition. They can also be used to provide for specific skills when required or a useful evaluation.

Ensuring the long-term sustainability of a non-profit organisation is a juggling act.  Different from for-profits that have greater control over their products, NPOs need to ensure that the social impact they make is their key outcome and that needs to satisfy various stakeholders, including donors and the communities they serve. There is a greater minefield of relationships required to ensure viability, reputation and partnerships, but this needs to be underpinned by clarity around purpose together with sound financial planning.

Lastly, a plea to those who want to establish a new non-profit organisation. Taking into account that there are thousands of others involved in the sector, it may be more useful to combine efforts with others in the same field, rather than start an independent organisation.  There are significant responsibilities when running an organisation and many collapse as quickly as there are new ones on the block.  It would be helpful to undertake some research to find who else is working in your area of interest before embarking on any form of duplication.

There simply are not enough resources for all.

Shelagh Gastrow is a Founder and Director of GastrowBloch Philanthropies, a philanthropy advisory service that helps individuals and families integrate their wealth and values into meaningful and effective philanthropy. She was the Founder and Executive Director of Inyathelo: The South African Institute for Advancement from 2002 – 2015, and focused her efforts on strengthening civil society and promoting philanthropy in South Africa.

This is the fourteenth NGO analysis of my 2018 #NGOs4Africa Campaign.