How much importance is given to the strategy of “better managing the aid already received”? to build up reserves and equity? What concrete mechanisms are suggested?
External aid is often perceived as a “temporary necessity,” and overreliance on it is seen as a long-term obstacle. Therefore, maximizing the use of existing aid to build a solid financial base is a priority.
IMPORTANCE OF BETTER MANAGEMENT OF THE AID RECEIVED
There are several reasons why this strategy is important:
- Create long-term financial security: The ultimate goal is to reduce dependence on external aid and ensure the organization’s sustainability. Building reserves and equity is essential to cope with unforeseen events, invest in new projects, and ensure business continuity. Without capital and reserves, self-reliance is illusory, and dependence on aid continues or even increases.
- Increase management flexibility: Having their own funds allows DOs/NGOs to have greater flexibility in managing their activities and not be entirely subject to the conditions and timetables of donors. This makes it possible to finance institutional strengthening expenses (training, fundraising, studies, etc.) which are crucial but often difficult to finance through project aid.
- Building credibility and trust: An organization that demonstrates its ability to effectively manage funds received and build its own reserves inspires greater confidence in donors and partners. This can facilitate access to future funding and more flexible terms.
- Preparing for the end of aid: External aid has an end. DOs/NGOs must anticipate this deadline and put in place self-financing mechanisms to ensure their long-term survival. Better management of existing aid is a crucial step in this process of transitioning to self-reliance.
SUGGESTED CONCRETE MECHANISMS FOR BETTER MANAGEMENT OF AID AND BUILDING RESERVES AND EQUITY CAPITAL
Several mechanisms and techniques are proposed in the sources:
- Negotiate with aid agencies to allocate a portion of the funds to building funds and reserves: It is crucial to discuss with donors from the outset so that a portion of their contribution can be used to create equity for the DO/NGO. This includes the creation of working capital, funds for the purchase of new equipment (depreciation), research and innovation funds, funds for new projects, a reserve fund for exchange differences, and a general reserve fund. Obtaining donor approval is essential before transferring funds to these reserves.
- Capitalize profits from economic activities and the sale of services: Profits generated by the organization’s economic activities must be reinvested as a priority to increase capital and reserves. This is a key driver of financial autonomy.
- Using the profits from good management of financing agreements: Rigorous management of contracts with cooperation agencies can generate margins that can be capitalized.
Create specific reserve funds:
- Contractual Obligations Fund: To meet future financial commitments.
- “Risk/Calamity” Reserves: To protect against unforeseen events (climatic, economic, etc.). These funds can be funded by special contributions from members.
- General reserve: To ensure the long-term stability of the organization, the application of a rule similar to that of commercial law (transfer of a portion of profits) is suggested.
- Renewal Fund: To anticipate the replacement of equipment and infrastructure initially financed by aid.
- “Research/innovation” fund: To invest in the future development of the organization.
- New Project Fund: To initiate new activities without waiting for approval of new funding requests.
- Actively manage cash flow and invest reserves: Effective cash management frees up available funds that can be invested to generate interest, thereby increasing own income and reserves. It is important to choose safe investments and carefully plan for future cash flow needs. Interest from these investments can be reaccumulated to increase the reserve fund or used for other purposes decided by the board of directors.
- Managing exchange rate differences: In countries with high inflation or unstable currencies, it is important to negotiate with aid agencies to protect against the adverse effects of devaluation. This may include remittances in hard currency or the ability to retain interest earned on hard currency funds.
- Include institutional strengthening costs and reserve building in funding request budgets: It is essential to make these expenses visible to donors from the negotiation phase.
- Use unrestricted funds and own revenues to strengthen reserve funds: General grants and revenues generated by the organization’s own activities are important sources for strengthening reserves.
- Internal and external billing: Implementing clear billing systems for services provided can generate own revenues that contribute to financial autonomy.
In summary, the strategy of “better managing aid already received” is considered an essential lever for achieving financial autonomy for DOs/NGOs. The concrete mechanisms suggested emphasize proactive negotiation with donors, rigorous management of funds received, capitalization of own income, creation of specific reserve funds to address various needs and risks, and active management of cash flow and investments. The objective is to transform aid, initially intended for specific projects, into sustainable capital that ensures the organization’s long-term security and financial independence.
