Not for Profit organisations are being warned to think carefully before becoming involved in trading organisations to generate income, with a new survey finding many are doing so with insufficient preparation or due diligence.
The survey by Grant Thornton covered 416 Not for Profit organisations in Australia and New Zealand. It is one of the most comprehensive undertaken in the sector on an Australasian-wide basis.
In its report ‘Doing good and doing it well?’, Grant Thornton says funding issues are forcing Not for Profits to look at new revenue generators such as their own trading organisations, known as social enterprises.
Grant Thornton New Zealand Partner, Barry Baker says while social enterprises promise one solution to the funding squeezes, they are easily mishandled and can pose significant risks to organisations that lack appropriate business and governance expertise.
“Our survey result suggests that in New Zealand, at least, many of the Not for Profits that are considering establishing or buying social enterprises are doing so with insufficient preparation or due diligence,” Baker says.
“We asked respondents how they have prepared to set up the trading operation. Thirty eight percent had taken independent advice and 30% gained sign-off from their governance body to change the risk profile of their investment.
“About one quarter had completed due diligence on the trading operation, while one in seven set up the trading operation as a separately incorporated entity.
“Almost half were not planning to set up the trading operation as a separately incorporated entity. We regard this as a risky strategy as it exposes the whole Not for Profit organisation to the potential business risks and consequences of failure of that particular enterprise.
“This should sound a warning bell. It also points to the increasing need for Not for Profits to appoint boards with ample commercial and governance experience that are likely not to mirror the Not for Profit’s primary Board”, Baker says.
The Grant Thornton report reveals that about 75% of the organisations surveyed in Australia and New Zealand were considering alternative revenue sources, such as social enterprises and fundraising.
“But given the number of competing causes in the Not for Profit space we believe that there are limited opportunities for many to grow their revenue significantly by increasing traditional fundraising methods.”
The Grant Thornton report suggests reducing competition in the Not for Profit sector through greater collaboration and consolidation as a means of achieving sustainability in the medium term.
“New Zealand’s whanau ora model, which has seen like-minded organisations integrate and share services shows one possible way forward.”