LECTURE HANDOUT 6(B)

COURSE: PROJECT MANAGEMENT

CHAPTER: FINANCIAL SUSTAINABILITY
PROGRAM: BBA, IIUC

Manjurul Alam Mazumder*

6.1 Concept of financial sustainability:
Financial sustainability is the continuous access to resources for financing its activities.
Therefore the reliance on foreign grants has to be avoided and banking on local financial
resources has to be stimulated; for economic activities this means relying on own earned
income; for delivery of society services this generally means relying means relying on a
mixture of beneficiaries contributions, local fundraising and government subsidies.

6.2 Factors determining financial sustainability:

Factors that determine the financial autonomy and sustainability of organizations can be
found on three levels:
1. The level of institutional set-up
2. The level of finance mechanisms
3. The level of financial management

The fires determining factor is the institution one. It includes elements such as the legal
status of the organization, its objectives and activities and the internal organization. The
legal status has an immediate effect on the legal possibilities for creating and sustaining
certain finance mechanisms. Associations, trust funds, companies all have different
possibilities for organizing income-raising activities, having access to local subsidies,
external donations etc.

The objectives that the organization wants to reach and the activities that it want to
execute all determine the need for finance and the possibilities for mobilizing finance.
The internal organization will also influence these needs and possibilities.

The second factor determining financial sustainability are the finance mechanisms
themselves. There is evidence to suggest that gift or subsidy mechanisms do not
contribute to genuine development, but all too often fuel a fatal dependency syndrome.
Therefore development programs need to develop other finance machismos such as: cost-
recovery, cost-sharing, capital shares, membership fees, local fundraising… in driver for
more finance autonomy and thus more financial sustainability, the right mix of all these
instruments has to be found.

Finally the third determining aspect of financial sustainability touches on financial

management, including cost and income management. In programs we often find a lack
of cost-consciousness. Some of the most known examples are :
 The fact that a lot of programs do not cost for the replacement of assets.
 Recurrent costs are often underestimated.

*
Assistant Professor, Dept. of Business Administration, IIUC
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  In economic programs no distinction is made between variable and fixed costs.
 No much is done for attributing costs.

One of the consequences is unclear pricing (no relation to real costs)

Also income is often poorly managed. No distinction is made between different sorts are
sources of income. A classical example is an economic village program that uses the
same bank account as the village. Together with a lack of bookkeeping this leads to poor
management of funds.

6.3 Policies for financial sustainability:

In a modernized society every activity if not based on voluntary action needs financial
means in order to be viable. We can distinguish social activates and economic activities.
The main difference lying in the fact that economic products and services can be sold at a
market price in order to cover for their costs and a profit margin. In the end however the
distinction between social and economic activities is a political one. The society has to
decide if the paying for certain products or services has to be done by each individual (at
a market-price) or has to be done a communal basis.

The important elements of a policy framework aiming at financial sustainability:

1. A distinction has to be made between the delivery of social services and the
running of economic activates.
2. An engagement in this two types of activities under one management has to be
avoided.
3. A prolonged engagement in supporting economic activities of beneficiaries has to
be avoided in order to prevent market distortion (e.g. the displacement of
entrepreneurs). This can be done by: limiting the share of the project in the set-up
of the economic activity; preferable this share should be in the form of a credit;
support to economic activities should be clearly limited in time.
4. If an NGO or a project engages itself in economic activities, it should do so in a
businesslike, way, this means: a minimum of all cost covering through own
earned income; this implies true and except cost calculation and efficient cost
management; appropriate trained personnel; a proper corporate structure.
5. True and exact costing is elementary for financial sustainability. Therefore, a
distinction between different cost-centers for different project functions or
different activities is necessary.
6. A similar distinction between revenue centers (profit centers in economic
activities) is necessary.
7. Economic activities of beneficiaries should be financed through own earned
income.
8. The delivery of social services should be financed though a mix of beneficiary
contributions, local fundraising and subsidies.
9. The institutional set-up of a project should reflect the managerial and cultural
differences between the delivery of social services and the running of economic
activities.
10. Financial sustainability requires efficiency and cost-minimization.

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Three important steps towards financial sustainability:
01. Adopt an appropriate institutional set-up
02. Adopt proper cost and revenue calculation (per function / activity)
03. Adopt proper accountancy procedures
04. Improve your sustainability index.

6.4 Measuring Financial Sustainability of Projects:

Dependency and Sustainability Index

Service A Service B Service C Total
1. Direct costs
a) Direct material
b) Direct labor
c) Other direct
d) Total direct costs (prime costs)
2. Indirect costs: % spread % % %
Indirect costs: spread
3. Total costs
4. Revenues
a) Beneficiaries’ contribution
b) Local fundraising
c) Government subsidies
d) External grants
e) Total revenues
5. Dependency index 4d / 4e
6. Sustainability index on prime costs
a) Ordinary: (4a+4b+4c)/1d
b) ‘Acid’: 4a/1d
7. Sustainability index on total of costs
a) Ordinary: (4a+4b+4c) / 3
b) ‘Acid’: 4a / 3