What is a Financial Model and which are the models created from Auleda in the framework of IDEA Project—ROI Models.
Money is a constant topic of conversation among nonprofit leaders: How much do we need? Where can we find it? Why isn’t there more of it? In tough economic times, these types of questions become more frequent and pressing. Unfortunately, the answers are not readily available. That’s because nonprofit leaders are much more sophisticated about creating programs than they are about funding their organizations, and philanthropists often struggle to understand the impact (and limitations) of their donations.
A funding model is a methodical and institutionalized approach to building a reliable revenue base that will support an organization’s core programs and services. While it is common practice among most nonprofits to seek funding from multiple sources, research has shown that 90 percent of the largest nonprofits have embraced funding models built around a single dominant source of revenue (such as a government group, a corporation, or an individual donor).
Different types of nonprofits are suited to different funding models, depending on their mission and programs. Funding models are defined and distinguished from one other based on three characteristics:
(1) The type of funding (e.g., government or individual),
(2) The funding decision maker (e.g., government administrators or wealthy individuals), and
(3) The funder’s motivation (e.g., altruism or self-interest).
Why are alternative financial models in Albania necessary?
Currently social enterprises are facing a significant shortage of funds, as a significant barrier to new ideas, but also to further expansion of activity. Social enterprises should not only cover daily expenses such as salaries or administrative expenses, but also other financial expenses.
Mostly the financing of organizations is more focused on the grant model, donations, fundraising or through bank loans. In fact, non-profit organizations are not very happy with these funding models.
Concerning the financial situation in Albania, there is currently no credit line specifically referring to NGOs or Social Enterprises. It should also be noted that a considerable number of social enterprise executives say that relying too much on grants is a risky strategy, as individual grants are limited in time and not very sustainable in the long run. The grant method can also reduce the motivations of leaders and employees to professionalize the business aspect, which leads to a deteriorating business climate, in other words, there seems to be a deep need for funding opportunities other than traditional ones.
For this reason, Auleda is working on the construction of alternative financial models that can provide access to funds for social enterprises within the framework of the IDEA project Investment Development and Empowerment Actions, funded by the European Union. Three ROI Models are created In order to attract investors.
Model I – Match Funding Model
In the match-funding model, government or private foundations match investments made by private investors (pension funds, banks, mutual funds, etc.) with taxpayer money or philanthropic donations. Private investments typically go through an intermediary organization (e.g. investment fund or NGO) with particular expertise and insight into social enterprises and the market in which they operate.
Typically, the private investments are matched one to one by the involved foundations or government sources. The payoff (interest, share on profit, etc.) can flow back either directly to the investors as illustrated in the model below, or can be paid to the intermediary organization, which in turn distributes it among the involved investors.
The model is attractive to private investors who, compared to non-matched areas, can potentially create a larger impact for the same investment. This increases the likelihood of a solid payoff and thus raises the attractiveness of the investment. As regards governments and foundations, the match-funding model presents a way to ensure that the funds invested in the social enterprise sector are supplemented by private sector funding. In addition, any potential payoffs are reinvested in other social enterprises.
Thus, the model is often a favorable and more sustainable alternative compared to purely government or foundation sponsored one off investments. The social enterprises benefit from larger investments and the fact that it becomes easier to persuade private Investors to invest in their enterprises. At the same time, the investments put pressure on the social enterprise to reach certain performance criteria and pay back the investment (plus returns).
Different arrangements are often made in terms of how the payoff is divided between the private investors and the involved foundations or government institutions. For instance, the payoff may be divided based on the share of the total investment made, or subordination agreements can be made, where, for instance, investments made by private investors are subordinate to those of the foundations or government institutions.