The Income Mix Tells You More About a Charity Than Its Mission Statement

The points below about the composition of charitable income are ordered by how much difference they make, not by how often they get repeated.

Reading the income note

Published accounts normally break income into categories such as donations, grants, contracts, trading, investment and legacies. That breakdown is more informative than any narrative in the report, because it shows what the organisation is structurally dependent on. The proportions matter more than the total, since two organisations of identical size with different mixes behave in completely different ways.

Comparing the mix across three years shows direction, which is usually more revealing than a single year in isolation. This note is typically short and near the front of the financial statements rather than buried.

Concentration risk

An organisation receiving most of its income from one funder is one committee decision away from a crisis, regardless of how good its work is. That dependence also shapes behaviour, because nobody argues freely with the source of most of their funding. Diversified income costs more to raise, since each stream carries its own fundraising, reporting and relationship burden.

In the annual accounts, the trade-off between cheap concentrated income and expensive diversified income is a genuine strategic choice rather than an obvious answer. Accounts showing one funder at a large share should prompt the question of what the plan is if that funder stops.

Contracts are not grants

A contract pays for a defined service at an agreed price, with specifications, performance measures and the possibility of penalties. A grant funds an organisation to pursue a purpose, generally with more latitude about how and reporting rather than enforcement. Organisations moving from grants to contracts often find their independence narrowing, because the specification defines the work rather than the need does.

On the shop floor, contract prices are sometimes set below the full cost of delivery, with the shortfall met from donations, which is a subsidy going in an unexpected direction. Where a charity's income is largely contractual, it is functioning partly as a public service supplier and should be read as one.

Trading, and what it really contributes

Shops, cafes, training, publications and hall hire generate income that arrives without restriction, which makes it unusually valuable. Trading income also carries genuine cost, and gross turnover in a shop chain tells you nothing at all without the corresponding expenditure. Accounts usually show trading net of cost somewhere, and finding that figure is the only way to know whether the activity contributes.

Some trading exists for reasons other than profit, including employment, visibility and providing a service, which is legitimate if stated. Trading that loses money without a stated non-financial purpose is the case worth asking about.

Legacies and investment income

Legacy income is unrestricted, substantial for some organisations and almost entirely outside their control in any given year. Investment income depends on holding reserves, which is exactly what organisations are frequently criticised for doing.

Both streams provide the flexibility that funds core costs, innovation and the ability to survive a bad year without cutting services. Organisations with neither are far more exposed to short-term funding decisions than their size alone would suggest. This is part of why an old, well-endowed charity and a young one of the same turnover are not comparable organisations.

Overhead ratios are a weak measure of a charity and a strong measure of its accounting.

What to ask from the mix

Ask what proportion of income is unrestricted, since that single figure predicts a great deal about how the organisation can operate. Ask whether any single funder exceeds a substantial share, and what the contingency is if that relationship ends.

Sorting the donation bags, ask whether contract income covers its full cost, because a subsidised contract is donated money funding a public service. Ask whether trading contributes net, rather than accepting a gross turnover figure from a press release. Four questions from one note in the accounts will tell you more than an hour spent reading the narrative report.

Everything above, in order of what to do first

1. Reading the income note. Published accounts normally break income into categories such as donations, grants, contracts, trading, investment and legacies.
2. Concentration risk. An organisation receiving most of its income from one funder is one committee decision away from a crisis, regardless of how good its work is.
3. Contracts are not grants. A contract pays for a defined service at an agreed price, with specifications, performance measures and the possibility of penalties.
4. Trading, and what it really contributes. Shops, cafes, training, publications and hall hire generate income that arrives without restriction, which makes it unusually valuable.
5. Legacies and investment income. Legacy income is unrestricted, substantial for some organisations and almost entirely outside their control in any given year.
6. What to ask from the mix. Ask what proportion of income is unrestricted, since that single figure predicts a great deal about how the organisation can operate.

The takeaway

Read the income note, compare three years, and ask what happens if the largest line disappears.

Unrestricted money is the most useful gift and the least satisfying to make.