Updated: Dec 8, 2021
The fundraising pitch went well, and thirty days later, you shout in excitement as a six-figure number pops up on your e-banking app. But don’t get too pumped. Now begins the quest of spending your resources diligently. Here are a few key guidelines to consider:
Spend only on one or two high-impact projects
Cut fixed costs
Use an activity budget
Start with a low salary
Watch out for common cost drivers
1. SPEND ONLY ON ONE TO TWO HIGH-IMPACT PROJECTS
As a curious founder, you see so many opportunities for your charity. It is tempting to pursue many of them at the same time. Yet that would be a mistake. By spending on various projects, you allocate funding to opportunities below the top choice in terms of impact. Why spend on the second, third, and fourth most cost-effective project if you can instead pool resources to the best choice?
As you spend on more than one project, you are not just reducing your monetary power but also your managerial focus. You already have limited bandwidth with one project as a charity founder. Don’t stretch it further. So as a general rule, focus on one project at a time - or in exceptional circumstances on two.
2. CUT FIXED COSTS
A trendy office in the heart of London: doesn’t this qualify as an investment in your staff and your organization’s long-term success? Watch out before you sign that two-year lease in the glass skyscraper. While possibly obvious in this example, the choice for which fixed costs make sense is not always easy to spot. The problem with such costs is that they increase your overhead while not having a direct relationship with the number of beneficiaries you serve. The size and interior of the office do not influence your potential to fulfill your charity’s mission. Many organizations, including charities such as New Incentives, operate completely remotely. Others like Charity Entrepreneurship have successfully found affordable offices even in global cities such as London.
Reducing fixed costs applies to staff as well, most likely your number one expense item. Here it is less straightforward as you need skilled staff members to serve your beneficiaries. You also don’t want to burn out or stretch your managerial capacity too much by not recruiting. Yet as an early organization, stick to the co-founding team for as long as possible. Your program might still iterate quite a bit and new hires might not fit into an organization that has undergone a pivot. While staff increases capacity, it also requires more oversight on your end. Additionally, being a smaller team forces you to focus on your strategic decisions. And of course, fewer staff equals lower cost.
3. USE AN ACTIVITY BUDGET
Your overall budget includes all expenses from program to overhead. Your activity budget, on the other hand, tracks all costs going into serving one beneficiary. As such, it allows you to track your unit costs. Working with unit costs helps you design a cost-effective and scalable program. If your beneficiaries are spread out over hundreds of villages or clinics, for example, you will have high transport costs. Noticing this in an activity budget will start the brainstorming process on how to serve beneficiaries in a more sustainable way (e.g. by organizing camps that bring beneficiaries together in fewer locations).
4. START WITH A LOW SALARY
We sometimes get questions from applicants whether they could assign themselves an annual salary of, say, $75,000. Technically, they can. After all, you call the shots as founder. Yet this might not be the best idea. A relatively high salary at a start-up has several downsides:
It limits your ability to pivot as your runway is shorter (all things being equal).
It makes fundraising harder by requiring you to potentially raise double or triple of what you would have asked for otherwise.
Depending on your donor, it can be seen as too high for an organization with an unproven track record.
Therefore, we encourage our incubatees to start out with relatively low salaries. As an organization we also believe in a culture that does not align seniority with a higher salary. Our co-founders, for example, are among the lowest-paid staff members. We encourage our charities to follow suit and actively decouple personal worth as an employee from the monthly paycheck.
5. WATCH OUT FOR COMMON COST DRIVERS
Aside from salary and office, there are several other common cost drivers at charities.
Field transport can be a crucial one. A developing country context does not mean that transport will be particularly cheap, especially if you have many staff members who need to travel on a frequent basis.
Electricity is another, as the grid can be unreliable in many countries and running a generator is expensive. As a modern organization you likely run your program digitally, so you need to factor in the costs for getting each staff member at least a mobile phone and accessories such as power banks.
Finally, training costs can be higher than expected - as you usually underestimate the duration needed to onboard new field staff and facilities such as training halls are costly.
In sum, there are many ways to make the best of your charity’s finances as a founder - so make sure to protect this six-figure number on your start-up’s bank account for as long as possible.