Ask the right questions before you start a charity shopOriginally published: September 2017. | Last reviewed: April 2018.
A café in an art gallery; the Oxfam shop on your high street; a national heritage site that charges an entrance fee; the counselling charity that's contracted by the NHS to deliver services in its local area.
These are all examples of charities supplementing their income by selling products or services. Their earnings support the organization's overall mission and help its financial sustainability, but benefit to the community or the greater public good — rather than making a profit — remains the priority.
As grant funding declines and competition for donations becomes ever more intense, more and more charities are considering trading. In the U.K., sales of goods and services by the voluntary and community sector now make up more than half of the sector's income, according to Knowhow Nonprofit.
But it's vital to understand all the implications before beginning to trade. Start with the following questions.
Charity trading — are you allowed?
Not all charities are allowed to trade. Start by checking your governing documents. If they don't allow you to trade, you may need to amend these first.
Charity trade tax implications
Trading can make you liable for taxes, depending what and how much you're selling. A U.K.-based charity must pay tax on profits, except in cases where:
- You're making money to help your charity's aims and objectives, known as "primary purpose trading"
- Your level of trade that isn't primary purpose falls below the charity's small trading tax exemption limit (see how the limit is calculated)
- You trade through a subsidiary trading company
Note that definitions of nonprimary purpose trading are quite broad and include general fundraising activities done to support the charity's mission. For example, as legal firm Bates Wells Braithwaite points out, buying a batch of ready-made Christmas cards and selling them at a profit is considered nonprimary purpose trading. (Selling cards that are handmade by your beneficiaries, on the other hand, would usually be classed primary purpose.)
If you think trading could become a significant source of income and/or it's not directly related to your work, you may want to set up a trading subsidiary in the form of a noncharitable company. The Salvation Army, for example, has charity shops, clothing recycling and a company selling brass band instruments, whose profits help fund the charitable arm of the organization.
Some former charities go a step further and become social enterprises themselves. This means losing charitable status and the tax advantages that come with it, but allows more flexibility in how the organization is run.
Can you meet the Charity Commision's standards?
Charities choosing to trade will be expected to ensure any services or goods they provide meet professional standards. In addition, they must comply with any codes and regulations that govern for-profit businesses in the same field — for example, food health and safety regulations if you're setting up a café.
Is there market demand for the products or services you're planning to provide?
To be a reliable source of income, a successful business model must become — and remain — competitive. A market analysis before you start will help you better understand customers, demand, competition and any barriers you might face. Use tools such as a business model canvas to clarify your model and to help you write a solid business plan.
Do you have a sustainable fee structure?
Depending on what you're offering, you might use one of the following fee structures:
A mandatory fee is a predetermined, stated price for the products or services offered. To determine appropriate fees, ask these questions:
- Why do you need to charge for this particular product or service?
- How much does it cost to offer the product or service?
- What are your competitors charging for similar products or services?
- How much do you need to earn to cover your costs?
- Will you offer discounts or sliding scale fees?
- How will your target market react to the fees?
A voluntary or requested fee model requests, but doesn't require, a fee for a product or service. A "suggested donation" is an example of a voluntary fee.
A membership is a periodic fee — paid monthly or yearly, for example — in support of an organization.
A hybrid model is a combination of various fee structures. For example, an arts organization or public media company might ask supporters to pay an annual membership fee. In addition, they might ask for supplementary voluntary donations or require supporters to purchase tickets for a performance or exhibition.
Create a charity shop business plan
Running a successful trading operation requires a commercial mindset. That means knowing what it costs to offer a particular product or service, including paying service providers and purchasing equipment or materials. Remember, too, the associated and hidden costs (administration, marketing, overhead, regulation, payment collection, record keeping and so on). Combined, these costs will reduce your total revenue.
Some grant funding is available to help charities or social enterprises generate more traded income. Social investment may also be an option worth exploring.
Note that in your accounts you will need to be able to identify which income has come from trading rather than other sources such as grants or donations.
How will you measure success?
Customer satisfaction and sales figures are critical, although by no means the only markers of success. It's equally important to develop frameworks for assessing the quality and efficiency of delivery, and the percentage of income dedicated to providing products and services (as opposed to internal and overhead costs). In running a business, you'll need to keep assessing and, if necessary, improving the impact of your products or services on the community you serve.
Does your team have the right expertise?
David McGlashan, sales and marketing manager at the School for Social Entrepreneurs, which helps charities transition to trading, says their clients often lack the necessary sales and marketing skills. "They can find it challenging to develop and implement an effective strategy, or to build any sales momentum — they may need to hire new staff with a sales or marketing background," he explains.
The School for Social Entrepreneurs also has its own experience of developing its traded income, and one key lesson was the importance of market research. "That really helped us to shape our offer," says McGlashan. "We were floundering a little until we went out and spoke to potential customers about the courses we were selling and what would best suit their needs."
Will your staff, customers and funders understand why you're charging for services?
Moving away from dependency on donations or grant funding requires a shift in culture. You'll likely need to explain why you've decided to change your model and how your commercial work will benefit — and not disadvantage — your mission. Involve your board as well as staff in the planning and implementation of the changes. This will help build support for the new approach and ensure a coherent message to the community.
Consider the case of the London Early Years Foundation (LEYF), which made the shift from grant funding to a more sustainable model as part of its expansion, whereby economies of scale and charging those customers who could afford their services helped fund their work in poorer neighborhoods. Initially, many staff were worried that this would mean no longer providing a service to those who needed it most. Quoted by Social Enterprise UK, LEYF chief executive says:
"I had to explain to them that we had to balance the business model so that you had a level of cash cow and a level of mixed-market — which is our majority — and that way we would actually be producing enough profit to give many more children a free offer."
Looking for U.S.-specific guidance? Read about fee-for-service models.
This article draws on the expertise of the School for Social Entrepreneurs, a U.K.-based charity that supports people using entrepreneurial approaches to tackle complex social problems, through practical training and more.