By Andrew Rainsford, associate at Action Planning.
A long time ago I left school and went to work in a bank. It was a long time ago. Mr Wilson had become Prime Minister and was enjoying the job so much that he went to the country twice in that year. There were power cuts and inflation was rearing its head. Power cuts got resolved reasonably quickly. It took decades before inflation was under control. My efforts, in banking, contributed little to the national economic recovery. Indeed, the pay was so poor, it did not contribute much to my personal economic situation!
What it did teach me, via banking exams, was a narrow definition of business. It was drummed into us that “a purpose of a business is to make a profit”. It was explained that this was true even if your business involved hens laying eggs; produced egg boxes; supplied the lorry to transport the eggs or was the shop that sold the eggs – or any stage in the process. If there was no profit, there was no business.
A few decades later and that maxim holds true. The purpose of a business is to make a profit. If it does not, there is no discussion about what the profit is used for; who receives the benefit of it; CSR policies and the assorted other discussions that take place in the commercial world.
I have never really understood the excitement about “full cost recovery” within the voluntary sector. Income has to exceed expenditure otherwise, we cannot serve our beneficiaries for as long as we would wish.
So, let’s just bounce some thoughts. Nothing too deep – just something to tease readers with.
What does full mean?
There should be an obvious answer to this. But, there isn’t! It has to include an element of overheads. However, lack of control of overheads will lead to inefficiency and bloated costs. In my work, with a care charity, the issue was slightly different to this. The trustees had spent so much time paring back costs that the resultant turnover was insufficient for the remaining overheads. As turnover dropped, overheads reduced yet became a greater proportion of expenditure. The turnround process involved retaining overheads at the level they were and increased turnover. Now, overheads are known – not just in sum but in purpose and we know the cost of service delivery. No contracts below cost are operated. New initiatives have a finite time to become viable. Yes, it is a charity but it is now operating a “donation by decision” policy whereas previously it was a “donation by default” because of the hidden subsidy on many contracts. Oh, and the CEO is now paid for a five-day week as the operation can afford to do so.
Full has to mean more than direct costs. Full also has to mean an element to replace equipment used in the operation – even if it was grant funded. It may not be grant-funded next time round. Full should also mean that there is an element for staff recruitment, backfill and inflation.
Your skill, as a CEO, is to juggle these and other balls. This article is to indicate where some of the balls are. Too much detail and it becomes full of balls – and of little use to anyone.
How do we know our costs?
What an odd question! We can all see our costs in our end-of-year figures; our monthly management accounts or even the daily printout from our accounting package – you know, the one that updates budgets in real-time.
When I was the CEO of a regeneration charity, we looked hard at our costs. We broke them down into a daily rate and then apportioned them over the normal hours of operation. This gave us a baseline rate for charge out on hires and contracts. It also enabled us to show customers how we wanted to be there, for them, in the long term. Seventeen years after I was the initial CEO (with no bank account or registrations in place [I learned to ask that question at the interview after that experience!]) the operation still has a strong balance sheet and is still delivering community good.
We used our calculated costs as the basis of funding applications. By and large, these were accepted by funders. We used our calculated costs to create a differential pricing structure. If we sweated the assets beyond the 40 hours per week we expected the additional income over direct costs (heat; light; cleaning etc) was bottom line – and, yes, we did know how much an hour it cost to light a building; heat space – and even operate cookers.
When we know our costs, we can deliver value on a long-term basis.
Recovery – how does it happen?
The very simple answer is that “it does”. Costs are covered by contracts and, in a normal commercial world, a tender process rewards efficiency and quality. But we do not live in that world at present. And, matters are complicated by some players in the VCSE sector deciding to subsidise contracts. Now, as we exit the second Elizabethan age (and a new Prime Minister) I have to ask why this happens.
Yes, I understand about social good etc. I also understand about charitable purposes, benefits, rationale and reasons for existence. But, to operate without fully recovering costs – why?
Some sections of the DWP claim that they want to work with the VCSE sector but do not have a budget for a meeting room, so can they have one for free? Tosh, pish and similar polite (and many more impolite ones) should be the response. If we start a relationship on that basis, we will always subsidise it. And, last time I looked, the government had better access to cash than any VCSE body.
Some local authorities use a procurement system that drives down prices. Play that game if you want but make sure that your costs are covered.
Some purchasers will play the “you are a charity” card. Correct, but how many charities are in operation to subsidise commercial operations? The Social Enterprise model is normally a reversal of this!
So, what now?
This article is a coffee time filler. It may answer questions; it probably prompts more. And the question prompting may be a useful element. How many CEO’s have someone who can be a sounding board? There are a number of us around who have been round the block and could be well worth the cost for four hours per month availability. There may be network within the sector in which you operate.
Fully Recovering Costs will ensure: Future Charitable Resources.
