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How Kids Company’s closure highlights the inherent funding challenge for charities

How Kids Company’s closure highlights the inherent funding challenge for charities

Kids Company is becoming a cause celebre. A very high profile charity, with its flamboyant founder and chief executive, Camila Batmanghelidjh, it has grown phenomenally over the last 18 years, and now provides services to over 36,000 children, young people and families, through its three sites, with a turnover in 2013 of £23m.

At least it did until now. The facts remain mired in vitriol; spin and briefing. Behind the facts of the £3m grant and the conditions – particularly Batmanghelidjh’s departure as CEO – the running of the payroll, and the attempted retraction of the grant, accusations abound. But, whatever the truth of why, Kids Company has announced it will close with immediate effect. What this shines a light on is the vulnerability of charities.

 

https://twitter.com/KidsCompanyUK/status/628993136413540352

 

On the face of it, Kids Company has indeed been a successful story. Certainly they serve a group that needs help. Research into the young adults they work with yielded these shocking statistics, of the level of concentration of difficulties:

· 50% have seen someone being shot or stabbed in their communities within the past year

· 1 in 4 have seen a friend or relative being shot or stabbed in the past year

· 1 in 5 reported being shot at or stabbed in their lifetime

· Are 5.2 times more likely to have experienced severe to extreme levels of emotional abuse

· Are 15 times more likely to have experienced severe to extreme levels of emotional neglect

· Are 4.6 times more likely to have experienced severe to extreme levels of physical abuse

· Are 13 times more than control participants to have experienced severe to extreme levels of sexual abuse

And the plaudits for their work and approaches have come from all corners; politicians, professionals, philanthropists – everyone from Coldplay to David Cameron.

Mostly this service, covering what many think is a state duty, has traditionally been achieved through philanthropy and volunteering, rather than government contracts. The last accounts in the public domain, for the year to December 2013, tells of how they had previously delivered their social care and mental health services without any government funding (they do receive funding from local authorities for their complex education needs services). But a gap developed, and they reached out to government for a grant for £4.5m.

From the accounts, under “Going Concern”:

“As the charity has no endowed funds, the level of activities in the financial year starting 1 January 2014 will depend almost entirely on its ability to secure continuing grant income. Whilst significant grants have been awarded, the organisation continues to grow very fast, and has low reserves relative to its size. The Charity’s history of delivering the maximum possible charitable objectives with the resources available has often put a strain on the Charity’s cash flow. The Trustees are confident sufficient funding will be secured and are monitoring the situation. The Trustees consider that debts will continue to be paid as they fall due.”

It was clear that the rapid growth had been causing problems. Businesses will find that growing pains can be as troublesome as not finding customers. Charities can be even more focused on delivering whatever services are needed, rather than checking on whether they can – it’s extremely difficult not to respond to the sort of charitable demand that Kids Company was, so successfully, addressing. This was borne out in their stated risks:

· “The greatest risk within Kids Company is deemed to be the risk of Kids Company not taking action where action is required in order to safeguard the vulnerable young people we work with, and maintain their best interests.”

· “Kids Company faces financial risks, including the need for having sufficient reserves, and balancing fixed costs against the security of its incomes.”

The “ response” to the second was more a position statement than any firm mitigation:

“Our business model is to spend money according to need, which is consistently growing. We aspire to build up our reserves when circumstances allow. Kids Company has a dedicated fundraising team.”

 

Not enough spend on fundraising?

Of the £23m they spent, less than £1.5m, about 6% was spent on fundraising and governance. Most of the remainder, something like 2/3 of their total expenditure, was on staff. It’s not, of course, that easy to flex your staff costs – and Kids Company had a level of reserves, around £500k, that wouldn’t last a month of payroll. Evidently, the reserves were too low – but the problem was much more one of predictability of future income.

Where did Kids Company income come from?

So what of the income? £5m from individuals, £6.5m from trusts and foundations, £2m from corporate, £1.3m gifts in kind, another £2m from auctions and events; and then £6m from government contracts.

Kids Company proudly note that they have 75,000 different sources of income. That’s a diverse funding portfolio, and high returns (over £10 from every £1 spent on fundraising, even ignoring the government money).

Some of the media reports have used phrases such as”relied heavily on government funding” – but in truth Kids Company relied on government funds for about 26% of their activity; this compares with 30% for the sector as a whole.

That money, of course, is only as good as long as it keeps coming. Mrs Batmanghelidjh has said that a potential £3m donation was withheld in light of – as yet unproven – allegations that details of incidents involving young people who used the charity were not passed to police. That of course is a donor’s prerogative.

 

Vulnerable organisations living on a knife-edge

But whether the gap was because of one donor, or more, it highlights the vulnerability of organisations living on a knife-edge. I am reminded of a charity I worked with in Rwanda, which had received a 3 year grant from DFID. As the end of the grant approached, the charity simply didn’t believe that the money would stop – after all, if anything, they’d uncovered even more need for their services. Ultimately, they got a stay of execution – a further year of funding, and we transformed the charity to a self-sufficient entity before the money ran out.

Just as with Kids Company, the funding that is most vulnerable doesn’t have to be government funding. According to NCVO, £19 billion – nearly half of the sector income – comes from individuals. In the commercial sector, we see shareholder activism, and similarly there is a growing movement from individuals to want to be able to see what their donation is spent on. Implicit in that is the threat that the donor would stop the funding if they are not happy with the charity’s activity. Corporates, similarly, would be quick to scrutinise what they are actually supporting. The Kids Company story serves to highlight how quickly things can go wrong.

So it’s no surprise that charities – or more precisely their staff – want to consolidate and strengthen their funding position. streams, multi-year funding agreements, even a healthy flow of contributions from people’s wills – legacies – all makes that income much more reliable, which makes longer term planning, and growth, easier to manage. It is a hackneyed adage that charities should want to see a world in which they are no longer needed. Until then, though, they want to establish themselves as permanently as possible.

 

Nick Mason

Nick Mason has over 10 years’ experience working in fundraising, typically at the sharp end of analytics. Most recently he was responsible for fundraising strategy at RNIB, with gross income of £67M, where he is also had responsibility for the database and data selection teams. He was part of the team that set up the Insight in Fundraising SIG, and holds an economics degree from Oxford, and an MBA from London Business School, as well as the MInstF (cert).

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