Business for Charities

Business for Charities edit

Setting Up and Running a Successful Livelihood Program

Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License, Version 1.3 or any later version, published by the Free Software Foundation; with no Invariant Sections, no Front-Cover Texts, and no Back-Cover Texts. Additionaly, this document is licensed under the CC-BY-SA.

Foreword edit

This manual has been designed and written for use by managers of charities, especially those located in developing countries, which already have started, or are exploring to start Livelihood Programs.

The overview covers most of the likely questions arising from those Programs, and care has been taken to write about the topics in easy to understand terms and language, although some terms might be not too familiar to charities in their daily work.

The manual has been kept as concise as somehow possible, yet it is intended to cover in sufficient detail the issues faced by charity management, and to offer innovative solutions to most questions.

It is the author’s hope that this unique manual, based on extensive business experience on four continents, will be a help to charities, and will point the way to set up Livelihood Programs successfully. The author encourages competent contributors to add further suggestions in order to improve this document.

Basic Issues edit

Charities worldwide are facing continuous funding problems, despite the ever increasing demands they face, especially in developing and poor countries. A significant amount of resources has to be applied to fundraising, in order to continue operations, thus further restricting funds available for their projects.

Comparatively few charities have established Livelihood Programs in the past, and if they did so, those were mostly on a very small scale and rarely professionally run. The skills needed to run such programs are seldom found inside charitable organizations, since their main purpose is based on social work, and their staff is selected accordingly. Nearly in all cases, even basic business or selling know-how, apart from specialized fundraising, is missing at all levels of the organization.

Livelihood Programs are desirable for several reasons:

they allow those most in need to obtain gainful employment, whilst generating pride in producing something of value;
they should contribute to the funds available to the organization for charity or education projects;
they can replace lost donations, or allow the organization to be less reliable on fund raising, thus saving money allocated there;

Consequently, the main issues to be studied are:

which Livelihood Program or programs to establish;
which products are truly saleable on a continuing basis;
how to set up and run such Livelihood Programs professionally;
how to sell and market the products to large and small companies in the most efficient way to benefit the charity.

Selection of Products edit

This is obviously one of the most difficult questions for charities to answer, since the type of product selected will determine to a large extend if the Livelihood Program, based on such product or products, will be economically successful and benefit the organization.

Although this manual cannot address all situations, the basic rule must always be this:

Can it be sold?

In general, the following questions should always be addressed:

can it be produced to a consistent quality standard?
can it be produced in sufficient quantities to warrant marketing?
will the delivery of the finished product always be reliable?
does the product fit the special circumstances and area of operation of the charity?
does the organization have an idea for a unique product?
if not, how can the proposed product be distinguished from any similar products presently on the market?
if the product is not unique, what changes in design, packing, color, look or feel could be incorporated to distinguish it?
can the product, or a part of it, be “green”, i.e. made from recycled material, grown in an organic way, or otherwise meet the ever increasing demand for “green” products?
does the type of product reflects well on the organization, and if possible, does it convey the values of the organization to the future user?

These are just some of the issues faced during product selection, but there could be others, depending on the individual circumstances. It is important to meet with everyone in the organization to come up with ideas for products, then to compile a list of those, to discuss advantages and disadvantage, and finally to select one or several of the products on the list.

It stands to reason that a product should be as unique or innovative as possible, and that it must be produced in as “green” a process as possible, since such aspects would be important selling points later on. Of course it is not easy to come up with new and innovative products, but much thought should be given, to find the best possible solution.

It should be obvious that hand-made or grown products of any type are always preferred, since the object is to provide work for as many workers as possible. For this reason too, any machinery, if used at all, should be simple and hand operated, since products easily produced by high speed machinery will always be made by specialized corporations, usually based in Asia, at the lowest prices.

It is possible to get some ideas from research on the Internet, especially from the gift, novelty or handicraft selections, but such research cannot replace a consistent and continuing search within the organization and the people who would produce such products. It is therefore recommended that products are first selected internally, and only then researched regarding existence, costs and availability in the targeted market for the product.

Even if a product has been selected within the organization, constant improvements in design, production, quality and consistency must always continue, even after introduction to the market, as is the case with all commercial production companies. Regular input from workers, the members of the organization, and their clients or supporters is very important to the continued success of the Livelihood Program and its products.

Prototypes and Testing edit

It should be obvious that all products, intended to be produced in Livelihood Programs, must first have prototypes, and then must be tested thoroughly. The reasons for that are:

to determine the best way to make the chosen product;
to find out exactly what types of raw materials or components, and in which quantities are required;
to get input from the workers regarding their interest in making the product;
to carefully record the cost of each component and type of raw material used;
to find out if a larger supply of these materials would be available, and if the price would be lower if bought in quantity;
to carefully record the time spent by each worker, or group of workers, making the product;
to determine what type of workers, or groups, would be most suitable and reliable for production, and to ensure that such workers would be plentiful and really interested in a larger scale production;
to discuss and estimate if a better process, or familiarity, would result in less time spent on the production of the product;
to consider how much space is required, if it is available, and if so at what cost, to produce the product in significant quantities;
to determine what type of production facilities, such as furniture, simple machines or similar equipment would be needed;
to extensively test the product, by supporters or others, in its projected use, and to determine if it will perform as intended;
to find out if special protection, for example against moisture, rain, sun or very frequent use is required to be incorporated;

Determination Of Product Costs edit

Once a significant amount of samples have been produced, the next most important question will be the cost for the chosen product. It is in this area where most charities make serious miscalculations, and miss initially minor costs that later on are magnified during larger production, thus leading to losses to the organization.

The first step is to appoint someone in the organization who is comfortable either with accounting, or, at a minimum, with the design and use of spreadsheets. The costing must be based on the same basic principles used by for-profit organizations, and therefore must capture all costs, based on:

Nothing is Free!

It is, of course, possible that certain facilities, parts, work or transport are provided free of charge to the charity. However if these items are not recognized during the all-important initial costing of the product, there is virtual certainty that later on some or all of the “free” items will become limited or will have to be paid for, thus forcing the organization to spend money that was never allocated, resulting in lower, or even no contribution to the charity.

For example, the charity might be able to initially use premises to store or work on the products, or a volunteer will offer to transport and collect all raw materials “for free”. Since such requirements are usually small in the initial stages, the tendency is not to count them in the costs of the product. This is correct for cash-flow purposes only, since initially those items will not have to be paid for.

As soon as serious production of an order starts, some, or even all, of the “free” items will fall away and will have to be paid for, yet the cost of the product and selling price will have been fixed by that time and invariably this then leads to losses by the charity. The costs should also be split into direct costs for the actual product, and indirect costs, such as transport, supervision, communication, and a certain percentage of general expenses occurred by the organization at that location. However, this is no license to load up:

It must be stressed that all costs must be accurate and fair!

Attached is a sample spreadsheet, showing a purely imaginary product of a stuffed animal, with the costs associated therewith: [spreadsheet will be delivered by the author]

Structure of the Livelihood Program edit

Certainly, one of the most important lessons concerns the actual structure of the Livelihood Program. Typically, a charity will simply absorb the direct and indirect production costs of an item into their general expenses, and treat any income from sales in essentially the same way as donations would be treated.

While this is an understandable way to run such a program within the charity, especially given the tax-advantaged or tax-exempt nature of the organization:

It is a cardinal mistake to co-mingle charity with “business”

The two parts of the charity must, by their nature, have a different focus, and, therefore, must be run as separate as somehow possible entities within the organization. The reasons will become much clearer later, when selling and marketing strategies are discussed in full detail.

It is not the purpose of this manual to discuss the charity aspect of an organization, because this is after all the main purpose, and all are focused to do the maximum good in their respective programs, with the minimum amount of money possible. With this in mind, all charities have dedicated, compassionate and very capable volunteers, and/or moderately paid social professionals, all of which are fully capable to effect the social changes or implement programs envisaged.

However, Livelihood Programs must be truly run as a business, which requires a completely different mindset by the group tasked with such programs, than would be needed for charity work. Unless this group can be trained and highly focused on the “business aspect” of a Livelihood Program, there is a very high risk that a Livelihood Program will not be successful at all or, at the very least, will not make the contribution to the charity that was hoped for.

Therefore, the only difference between any commercial “for-profit” company and a Livelihood Program should be that all of the actual “profit” will be plowed back into the charity, and the program does not generate a taxable profit. However the focus of any Livelihood Program should be to generate income or “profit” for the charity, to be used in their usual programs.

Based on the above, the “business structure” of a Livelihood Program should be similar to a “for-profit” company. Within the organization one suitable person should, if possible in an exclusive way, be dedicated to, and focused on, the Livelihood Program. Such manager, if she or he does not already have these capabilities, needs to be supported by a competent accountant, bookkeeper or person capable to design, implement and keep continuously updated the costing spreadsheet and a subsequent separate bookkeeping, although this person would not need to be on an exclusive basis.

Furthermore, a responsible person will need to be appointed, who is capable to train, motivate and supervise the workers in the Livelihood Program. It is that person who will ensure that pre-set, reliable quality standards, approved by future purchasers of the product, are maintained and constantly improved upon. This would also be the person responsible for certifying work completed, to enable the workers to get paid (in money or kind, such as food etc.)

Finally, the basic structure will need one or more confident persons that have the basic ability and can be trained in marketing and selling. This manual will lay out the most useful approach to be used when contacting or selling the final product to outside corporations. As “face” of the Livelihood Program, great care must be taken with the selection of such persons. Some presentation, communication and internet skills are essential, but, for reasons to be shown later, these persons do not need to be, indeed should not be trained professionals.

It is highly recommended that an Organization Chart of the Livelihood Program be established, although this may seem to be too much trouble during the start-up phase. Although perhaps only a handful of people will be listed on such a chart, the discipline required to make and, even more importantly, update the Chart when changes occur, will be worth the initial effort and help in creating the business-like structure, essential for the success of the Program.

A charity organization should also look at these aspects as a great training exercise for existing staff, and perhaps charity recipients, in how a small business should be structured correctly.

Marketing of the Product edit

All steps outlined before belong to the Research and Development (R&D) period, which could last from several weeks to several months. The better the steps implemented during the R&D period, the better the chance for a successful product launch.

It must also be noted, that all direct costs, incurred during the R&D period, should be compiled as they will become a small part of the indirect costing of the product.

As should be clear by now, no marketing should be attempted unless:

any additional variations of the product have been examined to see if they could add to the product list;
the product has been truly tried, refined and finalized;
a significant amount of good and consistent samples have been accumulated for presentation;
printed and digital photos of the product have been provided;
a name and part number has been allocated to the product (s);
a longer product description, together with possible uses of the products “features and benefits”, has been carefully produced;
unique selling features, such as “from recycled material”, made from “sustainable materials”, “green” product or production, etc. should be researched, documented and included;
all direct and indirect costs of the product have been determined
the Organization Chart has been completed and implemented;
the compensation for the workers for each product (preferred), or for each hour worked, have been set and agreed to by all;
applicable to a totally unique product only: consider registering the name and/or design with the patent office.

The next step should now be research of the internet, to see if similar products are being offered, especially in the region targeted for future sales. If such products are found, their offered price should be compared to the calculated cost of the product. It is possible that the calculated cost equals, or even exceeds the offered price found, in which case it is very advisable to go back to the initial costing for possible mistakes in assumptions or calculations.

Although the selected product will eventually not be sold at cost, any information found, shows the general price that could be expected to be paid for a similar product. Unless the prices are significantly different, one should not be too alarmed at this stage if the cost is close or slightly higher than the selling price on the internet. The method described under “selling” will explain in much more detail.

If the organization has a website, it would also be a good idea to list the product for sale on its site to see, if supporters of the charity would be interested in buying such an item. The price listed should be set not less than 100% higher than the cost obtained, for specific reasons to be shown later. At any contact with supporters the product should be mentioned and explained (“features and benefits”) and attempted to be sold.

Although this approach is very likely not intended to be the final selling channel for the product, valuable experience will be gained as to acceptance, price, quality and such of the proposed product, and this task should also be considered R&D, or test marketing.

As a product becomes more publicly known, it must be expected that the organization will be approached by agents or companies interested in selling such a product for the charity. This will especially be the case if the product is unique, or offers benefits, such as “green” that are not presently available in the marketplace. Although such approaches can be flattering, since they express interest and usually offer to sell the product for the organization, they will be overwhelmingly from agents that do not have the connections, knowledge or the funds required to properly market the product.

These are similar approaches to those often found when marketing commercial products. There are tenths of thousands of small agents and companies around the world trying to obtain new or improved products.

Their approach is usually that they will offer to sell, in a specific market, for the charity, but it is invariably at the charity’s risk, and must be avoided. Typically they will ask for samples and sometimes even consignments to be sold, all without any guaranty whatsoever to the organization, neither regarding specific quantities to be sold, nor money to be generated.

Additionally, there are always commercial factories, usually in the Far East, trolling the internet for new ideas to be used in their own production. Obviously it is not in the interest of the organization to have a developed product copied by a commercial company before it is even properly launched.

A similar approach is to offer to display the product at a trade fair, or to invite the charity to exhibit at a trade fair, if more products are involved. This should also be avoided, since those fairs are prime targets for agents and commercial companies to pick up new ideas or products that could be copied.

For the organization there is really nothing to gain and everything to lose in these types of approaches, since it will be dealing, completely unprepared and quite naïve, with seasoned professionals.

Therefore, each of these approaches could be answered with a short statement or reply that reads something like this:

“Thank you for your contact, which was much appreciated. However, our charity is looking only for a strategic partner in Australia (state the county or area) who will be a principal, and would usually use our products within their own organization.”

This kind of reply will signal to the other side that the organization has thought about the exact marketing approach to be used, and therefore can no longer be easily exploited. Should one of the approaches be from such a principal, who was not recognized by the organization, then such a company would very likely reply back with supporting documents or statements to that effect.

Any serious reply will need to be researched thoroughly, usually on the internet, to ensure that it is a bona fide company, capable of marketing, selling, or using in their advertising, the offered product:

“know your client!”

So the next question will be this: “who are our ideal clients?”

Naturally a lot of the answer depends on the product selected by the organization and its projected use. Many charities will concentrate on hand-made products that are mostly non-essential items for daily use, often gift items, but some products might be a special agriculturally based product, requiring a different set of clients.

Wherever possible, potential clients should be identified by carefully looking at their present product range, and how the product might fit in, or benefit their present selection, or their own organization in the form of advertising or free gifts. Much of that particular research can be done on the internet, but that research should be supplemented with talking to sponsors, supporters and any other person within or outside the organization, who might have better insight, and can offer suggestions or even introductions.

Typically, but not always, companies interested to buy products made by Livelihood Programs are located in one or several of the developed areas of the world, i.e. in Australia, Europe or the U.S.A. However, there is nearly always the possibility to identify one or two clients located within the country the products are produced. This would be a preferred start, since:

experience in negotiating and selling techniques can be obtained and refined;
smaller scale production can be implemented, thus bringing less pressure on the organization to “ramp up” quickly;
the product itself and the production process can be refined and most likely improved;
the initial costing can be verified on a much larger scale;
the local client will be valuable to provide feedback about acceptance in the market, or to convey any concerns;
any unforeseen problems with raw materials cost or availability, quality, consistency or delivery can be solved locally;
payments can be obtained more quickly and in local currency.

It is also often easier to get introductions to local companies than to overseas companies, but all possibilities, local and abroad, should be fully explored to find one, or better, several strategic partners in different parts of the world. This is a major distinction between products made by Livelihood Projects and those made by commercial companies, and must always be kept foremost in mind by the organization.

The reason why this distinction is very important is to allow the organization to take a completely different selling approach with the product than could normally be employed by a commercial company. When selecting the strategic partner, it is ideal to work with larger organizations, such as major department stores, mass merchandisers, or other branded companies that have high traffic in their locations.

Most of these types of companies also have the following in place:

significant own advertising to drive traffic to their locations;
an extensive advertising and marketing budget;
a professional company structure, with easier to identify employees, who are responsible for specific products categories;
a corporate need to be seen supporting local charities and the uplifting of their own disadvantaged people;
a corporate need to be seen buying, selling and using products that can be identified in some way as “green”;
a constant need to distinguish their corporation from their own competitors through different products, or support of charitable institutions;
a corporate need to be seen selling locally produced items;
a corporate budget for charitable contributions;
significant traffic in their locations with professional point of sales displays, or similar selling advantages;

Preparing for the Initial Sales Presentation edit

By now, the first potential client should be identified, and an initial contact established, although a proper sales presentation will not have taken place. Also, all points and items listed under “Marketing” should be available and completed.

What now remains to be decided is the “profit” the organization needs to generate, beyond the actual direct and indirect costs that have been accurately determined, checked and are fully documented. The idea of “profit” for a Livelihood Project is not at all well understood, and will require some explanation.

Let’s suppose a product is sold at or close to the actual direct and indirect costs, a charity or buyer would argue that this would be acceptable, since livelihood work is being created by a product being sold. This is a very common approach, but it is essentially false, and will not fulfill the initially stated goal, which is to add to the charity activities or to replace lost donations.

It is especially in this area of “profit” that existing thinking will have to be modified significantly by the organization. It is often the case that charities offer a product that barely covers costs, only to find, that some of these costs have been miscalculated or omitted in the first place, which now turns the activity into a loss-making part of the charity. As a commercial company, so a charity deserves a “profit”.

However it is exceptionally difficult to explain to a buyer that a “profit” needs to made, which anyway would be attacked and negotiated down immediately by a professional buyer. To overcome these issues, a different terminology must be used, and therefore the author coined the name Charitable Contribution to replace “profit” in this context. The need for that change will become very obvious later on in this manual; it is however crucial that such a surcharge be decided on and implemented, before the first meeting takes place.

Although not all projects are identical, and, therefore, the value of the Contribution can vary, it should never be less than 50% of the total verified costs, nor should it be very rarely more than 100%, which would apply to innovative or very desirable products. Provided that costs have been kept reasonable, a surcharge of at least 75% should provide about the fair amount to be expected.

The costing spreadsheet, prepared previously, will now be amended to include the Charitable Contribution. As preparation for the first meeting the following checklist might be of assistance:

no less than three consistent samples of each product and of each of its variations, such as color or size;
any tests performed, or results from samples used by actual buyers, or recipients of free samples, should be documented;
several printed and digital photos of the product, clearly marked with the short product name and part number;
the longer product description, together with “features and benefits”, in no less than three copies;
unique selling features, such as “from recycled material”, made from “sustainable materials”, “green” product or production, etc. are very important, but should only be supplied if they can be clearly demonstrated or documented;
a full account of all direct and indirect costs of the product, together with the Charitable Contribution, thus resulting in the determined selling price must be available at least in duplicate;
a copy of the Organization Chart should be available, if needed;
no less than two brochures of the charity, as used in standard communication; alternatively, photos and/or descriptions, or copies of other publications covering the charity;
any evidence of prior sales or use, even on a comparatively small scale, such as limited sales through the internet, in case of this being requested to support the acceptance of the product;
one copy only of a certified or audited income statement of the charity from the previous tax year;
obvious other standard items such as notebook and pens, business cards, if available, alternatively a letter with contact names, address and telephone numbers.

Mental Preparations and Thoughts edit

Like in many life situations, a good understanding and preparation of what can be expected during the sales presentation is of great value and can overcome many obstacles. With this in mind this section is written in a different style, as it is directed to the person or persons who will represent the charity and its Livelihood Program.

One of the major concerns is that you, the charity representative, will be up against buying professionals of the chosen company, therefore you might feel vastly outmatched by someone buying for a corporation on a daily basis, and used to always have the advantage. However this presentation is not a commercial offer to sell a product, and this should ensure that you actually can turn the presentation to your advantage.

As listed under “Marketing”, the corporation has some specific needs, and, therefore, a somewhat hidden agenda that is different from a normal buyer-seller meeting. As a reminder, the corporation is looking to accomplish quite different things, as mentioned before:

a corporate need to be seen supporting local charities and the uplifting of their own disadvantaged people;
a corporate need to be seen buying, selling and using products that can be identified in some way as “green”;
a constant need to distinguish their corporation from their own competitors through different products, or support of charitable institutions;

These are advantages you have, that are not available to any of the commercial representatives. The fact that you are not a professional, as buyers and seller always are, actually is an added advantage, since buyers would act differently with another professional. Because of the above facts, you will get significantly more leeway and consideration, compared to a commercial representative.

What this accomplishes for you, is to allow you to take “the high ground”, which means that your proposal is in a much higher moral plane, and more desirable, than any standard commercial offer would ever be.

The next mental reparation you need to work through is the issue of pricing, which most certainly will be one of the main discussion points during the meeting. You can absolutely be assured that significant pressure and several strong arguments will be put forth by the corporation, to convince you that your prices are too high.

Virtually all non-professionals, especially from charities, believe strongly, that they must be very flexible in pricing, not only because they have been told this, but because in their daily lives, especially in third world countries, haggling over prices is everywhere. You would be well advised, to resist any price cutting right from the beginning, because once it starts, you will certainly be outmaneuvered by the professionals you face, and you will very likely never recover the lost ground afterwards.

The following technique is a carefully thought out and researched method, to bring the advantage in pricing discussion to you, and to put the corporation in a significantly more difficult situation to resist the prices you are offering. You might remember that throughout this manual one of the main requirements was to have an accurate and fair spreadsheet of all direct costs and part of the indirect costs.

The strategy to be used here is relatively simple: you will allow the buyers of the corporation to see for themselves all costs for the product, and you will submit the costing sheet with the other material discussed previously. This is very unusual in business, since costing is one of the most closely guarded secrets of any corporation, and is virtually never revealed, especially not to their potential clients.

This accomplishes that you have now invited the buyers to prove your cost price wrong; consequently they will need to find mistakes in the costing spreadsheet for the product you offer. Provided that all costs have been carefully documented and researched, as mentioned several times in this manual, this will become a difficult, if not impossible task.

As you can see, you have accumulated several advantages, and, if implemented properly, you should now have the confidence to make the first appointment, and to arrive early!

The Sales Presentation edit

Most sales presentations last between 30 minutes and one hour. If not already known at the time of arranging the meeting, it is advisable to find out first, how much time is available for the presentation and for you to structure the meeting accordingly.

The introduction should be a general overview of the charity itself, the programs, the benefits to the recipients and the specific reasons why additional funds are needed. To support this part of the presentation, the brochure of the charity, or similar material, should be used and handed to the buyer. This period should not exceed a quarter of the time allotted, but in any event not more that 10 to 15 minutes.

If not already done in the introduction, the reasons and intentions for the Livelihood Program should be discussed, and how this Program can make a material difference to the disadvantaged recipients. This leads then to the product or products selected to accomplish that goal.

At this time the product samples, descriptions, and other information should be discussed and handed over to the buyer, without getting into the pricing. When the products haven been properly introduced, you should aim to get a feeling from the buyer, if some or all of the products would be of interest to the corporation. If the meeting has been granted, it could be assumed that the corporation would want the products, but a definite “yes” from the buyer at this stage gives you the first positive feedback and adds to confidence.

There are two ways a corporation would be interested in the products; the best scenario would be that they buy and sell the products, since this is a more long-term program. In this respect the display in their stores or on their website is very valuable. The other use would be for the corporation’s advertising, which is usually short-term and is being paid for from their advertising budget.

Even if you were successful to keep the prices out thus far, that question will come up at this time. Keep in mind that the corporation has already agreed that they could use the products, so the only major outstanding matter concerning all, is the price. It is now time to introduce the costing sheet to the buyer, which lists in full detail all costs to produce the product.

Make sure you hand the costing sheet to the buyer, if there is more than one buyer, hand one copy to each of them, and use a copy for your own presentation. Start with the final price, including the Charitable Contribution, and see what the reaction is, before discussing any details. Give the buyer time to look the list over and try to say nothing till the buyer first gives a reaction to the costing sheet.

Remember that the buyer never gets a costing sheet in their everyday dealings with commercial companies. Typically, the buyer will now start a hard-nosed discussion on why the price offered will not work for their corporation. Some of these arguments would be as follows:

we will not be able to sell (or use) the product at this price;
we need a “80%” mark-up to your price to meet our display and selling costs, overheads etc. and that makes the price too high to sell the product in our market;
at what prices did you sell thus far, for example on the internet, and what discount can you offer us?
we need you to cover x% for display or warehousing;
we have a better offer from another company for similar products;
we could get these products made cheaper “in China”;
surely, you only want to cover your costs to provide work, and not make “a profit” on us?
your prices are unrealistic for our designated market.

Note down very carefully each objection, as the buyer makes them, as most likely they will make only one or perhaps two at a time. This is important, because the buyer will see that you take their concerns seriously, and your own organization will learn exactly what arguments are made against the price or the product itself. Although many arguments in future will be similar, there is always the possibility that a new concern is raised and must be addressed for future sales presentation.

Your general attitude must be very friendly, but should also be very firm on the prices offered. Explain that the costs have been very carefully calculated and ask, if the buyer can see anything on the costing sheet that they feel would be too high or not justified. If the organization has done their job thoroughly, there should be no line item that can be shown to be excessive.

If the buyer can see, or can be convinced, that the costing offered is reasonable and correct, this would present a major concession or “yes”. If there are genuine and very specific concerns about a line item, be sure to note these down and tell the buyer that your organization will look into it and report back. Hopefully this will not happen, if all costs have been carefully calculated, and can be proven at the meeting.

Usually the question of “overheads” or “general costs” of the charity could be expected to be raised in this regard. To support these positions, you need in your possession a calculation of the overall local costs of the charity at the place of production, that were not itemized before, and why a particular percentage of those costs was applied.

An audited or certified accounting for the previous tax year could be used to demonstrate that these are actual costs and need to be taken into account for the calculation. For tax purposes, all charities would need these income and expense statements anyway, so they should be available. You should not initially volunteer or give these out to the buyers, but have these statements in your possession in case they are needed to prove a line item.

Do not move onto the last line item, the Charitable Contribution, till the actual costs have been resolved. Always try and get the costs agreed to by the buyer first, before discussing the Charitable Contribution, because if too many questions are open at a time, very little can be achieved. It is, therefore, always important in sales presentations, to answer each question and solve each objection, before moving on to the next.

By this time in the presentation, hopefully you were able to:

have the products and their quality accepted, and
have proven that the actual costs of the products are correct.

Even if just the above can be achieved at this stage, it will represent a major step forward. The big contention will now revolve around the Charitable Contribution that you have stated on your costing sheet.

It will be mainly here, that the buyer will argue that you should not include this, as the Livelihood Program will give work to people who need it, and this should be the only purpose of the charity, as in any event the charity is “not supposed to make a profit on the help, we the corporation are providing”. The arguments will be very strong and will be convincing, as the buyer realizes that this will be the best chance to obtain a better price for the corporation.

You must be prepared to stay very determined not to give in, as this will probably be the most crucial part of the sales representation. Your counter argument must always be that the Charitable Contribution is one of two main purposes (the other being to give work) of the Livelihood Program, because only from that line item will the charitable programs, such as education, food, shelter etc. have the funds needed to pay for them.

You need to explain, that every cent of the Charitable Contribution will be used for these programs, and that full accounting of that will always be available to the corporation. Let them know that the charity, or the Livelihood Program, as the case will be, uses GAAP, which is “General Accepted Accounting Principles”, and the only beneficiaries are underprivileged people who need hope and help.

Fairly strong language could be used, but should be in your own words, for instance like this:

“The Charitable Contribution is a vital part of the Livelihood Program, and exclusively benefits poor people. If I follow your suggestion and reduce the percentage, it will be the same as taking away food, shelter or education from people who desperately need these. I am sure, that all of us around this table would not want that to happen”.

The reason you can use strong arguments is, that you, the charity, are on the morally justified “high ground”, whereas the buyer is in a commercial buying situation. Since you are not a professional sales person, those types of arguments are even stronger, because there is typically reluctance, on the part of the corporation, to be seen to blatantly “take food out of the mouth of children”.

This does not mean that you can afford to be smug, but the above is a very strong moral argument, which can never be used in a commercial setting, and which is, therefore, morally very persuasive, even to a professional buyer.

If the negotiation does not get resolved at this stage, it will mean that eventually the buyer will be backed into a corner, since the corporation maintains that the quoted price will not work, and, therefore, no purchase can or will be made, whereas you will have hopefully stood your own ground, staying with a final price made up of the actual costs and the Charitable Contribution. It is possible that the meeting is then deadlocked, and it is time to “build a bridge” for the buyer or the corporation.

Supposing that the buyer really believes that the offered price makes the product impossible to sell, a question should be posed, if the corporation would not be able to reduce, or possibly eliminate, their own mark-up to their projected retail price, and to subsidize the reduction from their yearly charity budget.

A corporation could reduce their mark-up as their own contributions to the charity. As explanation say, a product would be offered at $ 2.00 by the charity, and the buyer maintains that they would need to mark-up to $ 3.90 to cover their extensive advertising, selling and overhead costs, which makes the product too expensive. If that argument is accepted, it will mean that the corporation treats the product of the charity exactly the same as any other commercial product, which in turn means that they make no contribution at all, since their final selling price will cover their own purchase costs and all other costs, and their projected profit too. An argument could be made that the corporation should substantially reduce their mark-up and book their resulting “loss” in their charity budget.

Another way is too inquire, if the corporation could reduce their mark-up by tapping their advertising budget for the perceived difference between their “calculated price” and their desired “market price”. Since they will be able to extensively use, in their regular advertising, their “good public image” by showing that they support a charitable cause and sell a subsidized or perhaps “green” product to the benefit of the needy, the difference could be subsidized from the advertising budget.

Sometimes it is possible that such arguments will allow buyers to get out of the corner they backed themselves into, but sometimes the gulf between the buyer and seller remains just too wide to bridge. If you fell that this is definitely the case, that the buyer does not bluff, and that there is absolutely no hope of eventually getting a purchase order, it is time to very carefully modify your own strategy. This must be a very last resort, and cannot lead to a lower price at that time; instead the approach should be as follows:

“If I can accept that our price cannot be accommodated, the only way out I can see, is to go back and re-examine our own costs, to see if there is a way we could reduce them. In order to really do that, I would need from the corporation, a definite quantity that you would commit to. This will allow us to calculate all our prices based on that quantity, and this could influence the prices we can offer to you”.

You have now signaled that the charity is flexible, but only then if a quantity is offered. Without a specific quantity discussion, this would merely be a general exercise in getting a better price, and would serve no purpose at all. If a quantity is given, then the corporation is usually genuinely interested to make a deal, and the charity can then really go back and recalculate their own costs, based on the stated quantities.

Such price concessions should never be done at the time of the initial sales presentation, because that would indicate a general flexibility in pricing by the charity. Instead, such concessions should be carefully examined, calculated, perhaps alternative components found, and, most importantly, discussions held with the workers if a better way could be found to make the product more efficiently, thus lowering the costs in a demonstrable way.

It is anyway understandable, that a second or third meeting might be required to get a purchase order, as delivery, quantity, product marking, and other such matters will need to be discussed. At this time it is also not out of place to inquire, who will make the purchase decision at the corporation, and if the next meeting could be held with that person present too, if it is not the buyer.

In general, a much better pricing situation exists, if the selected product is “green”, unique, a new design, or otherwise different from what is offered commercially. In those cases pricing becomes less intense.

The Purchase Order edit

Although piece is nearly always the most important point of discussion, an initial purchase order reflects much more than just price and quantity of a product. Many sellers are so relieved of having agreed to a price, that much less focus and time is spent on the many other, often vital conditions of a purchase order.

After price and quantity of a specific product to be purchased, the next important matters are delivery time, shipping and payment, all of which can have a significant impact on the success of the Livelihood Project, and are not always well understood or thought out.

Delivery Time edit

It is of great importance that much though is given to the initial delivery period, because failure to deliver the promised quantity on time can easily void a purchase order, or generate a lot of other problems. The major point to realize is that the corporation has now put their trust into the charity. The corporation will now provide space in their stores, advertising, event planning, signage or other, carefully selected components, to derive the maximum amount of value out of the new products; nothing will derail or complicate their work more than a delayed delivery!

The correct time to negotiate, is right at the time of getting the purchase order, and not while the delivery time is running already. Even some commercial companies are so happy to get the purchase order that they make unrealistic promises regarding delivery. For inexperienced charities, not used to issues connected with ramping up production, there is even greater tendency for wishful thinking. Especially when negotiating the initial delivery period, plenty of time is required, and it cannot be underestimated that training of workers, buying of components, marking for retail and packing just takes time.

It is always much better to be finished earlier than later. Now, that the corporation has done their part, it is absolutely crucial to the long-term success of the Livelihood Program that the agreed on delivery time is met in all details, and for the complete quantity that has been agreed on. All eyes, so to speak, are on the charity!

Training and Production edit

Although a limited production would have been made during the R&D period, production on a larger scale needs careful planning. While workers are being trained and, with their input, being coached on the best possible way of producing efficiently, someone else in the organization must order and receive all the components required for the order. It is often here, that problems can occur, since small quantities of components might have been free, cheap or easy to procure, whereas larger quantities are not always available when expected, and can be the cause for missed delivery dates.

Most of the supply line for components should have been checked during the R&D period, as mentioned in that section, but surprises can occur, especially when dealing with small suppliers or contractors in a developing country. Commercial companies have back-up suppliers for components, and this would also be advisable for Livelihood Programs.

It should also be clear, that workers need to be motivated to attend regularly and produce the items ordered. In production too, problems can and do happen, especially since the charity is using willing, but not always reliable workers, struggling with their own daily needs. When using a professional, trained workforce, absentees are much less frequent than in Livelihood Program. Therefore, great care has to be taken, to have plenty of alternative workers trained, and to rather over-estimate the workforce needed, than to under-estimate it.

Consistency edit

This is another vital part of any production, and is especially critical in non-formal environments, such as Livelihood Programs, that do not have the usual production checks required from ISO certified suppliers. It becomes even more difficult, when that charity has decided to make the products at different locations, or at the home of the workers.

Apart from agriculturally based products, or individually made handicraft items, that are expected to have variations, it is always best to have a production at one location. This will reduce losses with components, give a clear picture how fast production progresses and, most importantly, will ensure the maximum consistency of a product.

The corporation, purchasing the product, has seen and been given a very limited quantity of products, and has based their decision to purchase on these alone, expecting that the whole consignment will show a consistency in look, quality, size or craftsmanship. A charity, quite similar to a commercial company, must never attempt to “cut corners”, accept a lower quality from their workers, or in any other way lower the quality and consistency of the offered product.

The expectation of the corporation is reasonably based on the samples submitted, and this expectation must absolutely be met by the charity. Not only could the corporation refuse part or all of the payment if the quality or consistency is clearly not what has been agreed to, but any future business with them would be most difficult, if not impossible, to arrange. Therefore, at the very least one person of the organization must be tasked with enforcing consistency and quality at all levels.

Marking and Packing edit

Before the purchase order is finalized, marking and packing must also be discussed in great detail. Many countries and customs agencies have very strict requirements regarding marking, such as country of origin, detail of contents, using the label “green” and a host of other requirements. Additionally, the corporation has specific needs to have the product marked, for instance for retail, by using bar codes, retail tags, or labels on the product, some of which might have to be permanently attached.

The organization must make absolutely sure, to get full details of all marking requirements, not only needed for the legal sale or importation, but also for retail sale by the corporate client. These details or requirements must form part of the purchase order, usually in the form of an attachment.

Packing, on the other hand, should also be discussed, as the client might have special requirements, for instance a certain number of products in a carton, if bags are to be used inside cartons, markings required on the carton, how many cartons on a pallet, the type of pallet permitted (for example some countries require pesticide treatment of wooden pallets), or other packing needs. Obviously the requirements will differ greatly, depending on sales within the country of production, or export overseas.

Delivery Location edit

Another aspect that needs to be discussed and needs to be part of the purchase order is where the delivery is supposed to take place. If at all possible, the delivery should be “ex warehouse” of the charity, which is by far the most advantageous method for the charity, but this might not be possible in all instances.

In any event, additional costs accrue after the finished goods leave the warehouse or production of the charity, and those will either have to be taken into account during costing and quotation, or they will need to be covered by the client, which would be the preferred method. The charity should, wherever possible, take the position that they are not experienced enough to judge all these costs, and in any event would be out of pocket for the expenses till payment has been made.

Some of the costs are substantial, especially when overseas transport from a developing country to one of the preferred markets in a developed country is involved, and this is another aspect of business the charity is not really qualified to handle, especially when customs brokers must be employed, or shipping and insurance must be arranged.

An additional, very import consideration, concerns the payment and the risk, which is always based on the delivery location. If, for instance, the purchase order lists “CIF London”, but the charity is based in Asia, it means that the purchaser will typically not pay before the goods arrive, or, at a minimum, all required documents are in the possession of the buyer or their bank. This will cause serious delays in payment for the charity, and therefore could lead to a cash-flow problem, since all the costs for the produced goods have been paid already, but payment to cover all these costs is still outstanding.

It is for this specific reason, why the charity should always try and get the delivery location specified as “ex warehouse” (charity location), especially when overseas seafreight or airfreight is needed for delivery to the purchasing corporation. The issue is less critical with local delivery, but even in that case additional costs occur, although they are much smaller than for overseas shipments.

Delivery Type edit

The charity could face one of the following delivery types, sorted by decreasing desirability from the charity’s point of view (only the main types have been listed, there are more, and the explanations have been simplified).

“ex warehouse”, i.e. the location of the charity – preferred for all purchase orders, wherever possible, as the risk passes from the charity to the purchaser, as soon as loaded on a truck at the charity.
“delivered warehouse”, i.e. the location of the purchaser, nearly always applicable for deliveries within the same area or country. In this case the risk passes from the charity to the purchaser only, when the goods have been delivered and signed for at the purchaser’s warehouse.
“FOB” with named city. This means “Free On Board” either a ship or an aircraft from the stated location (harbor or airport). In this case the risk passes from the charity to the purchaser only when the goods have been actually loaded on board. There are also significant other costs involved, that would need to be paid by the charity, unless the purchaser agrees to pay for those separately. Some of these costs include: loading onto an approved carrier to deliver to the port or airport, road delivery from the warehouse to the harbor or airport, offloading or warehouse charges there, customs formalities outbound, loading charges onto the ship or aircraft, and charges invoiced by the forwarding agent. Only after the charges have been paid by the charity, will they receive the needed documents, which cover the title during transit.
“CIF” with named city. This means “Cost, Insurance, Freight” either by ship or aircraft from the location of the charity all the way to the designated delivery city of the purchaser. In this case the risk is passed from the charity to the purchaser only once the goods have arrived at the duty-free warehouse of that city. All the costs mentioned under “FOB”, as well as freight to the destination and insurance to cover all commercial risks, will have to be paid by the charity before they receive the “Bill of Lading”, Insurance Certificate and other documents needed to get paid.

Obviously there are some other methods, but to describe the ones above in even more detail, and list others would be too extensive. The charity can also inform themselves about the mentioned methods in more details, through the internet.

As can be appreciated, the complexity of delivering the ordered goods will increase, and so will the costs associated with the different transport methods. Although commercial companies are very well versed in these methods, costs and procedures, a charity can very justifiable plead ignorance, and ask that the purchaser, as the much more experienced party to the sale, should arrange for transport and shipping.

Payment Arrangements edit

Another important part of the purchase order should be the method of payment. Typically the corporation will demand some kind of delayed payment, as is often the case for commercial transactions.

The charity needs also to be reasonably firm, and should ask for special consideration by requesting payment right after delivery has been made, or payment within a short time thereafter, usually no more than one week or ten days. That period is usually enough time for the corporation to complete their accounting requirements and issue a check for the purchase.

By the time of delivery, the charity will have expended all the direct and probably indirect costs, which includes payment for all materials, and for the workers, who by their very situation need payment once work has been completed. Since charities typically will not have access to bank loans of any kind to finance these costs, it creates a cash-flow problem till payment has been received.

Final Step edit

As can be clearly seen from the section “The Purchase Order”, there is a lot more to think about during the ordering process, than just the price of goods. It is seldom appreciated by inexperienced suppliers, how much additional work and effort is required to actually deliver the promised goods in a consistent quality, and within the allotted time.

One final step is, for the charity to confirm acceptance of the purchase order, and the conditions contained therein, thus forming a “buy-and-sell agreement”.

The Delivery edit

If there is any doubt at all, that the promised delivery date cannot be met, it is an important obligation, for the charity to immediately contact the purchaser without any delay. Every commercial purchaser very much appreciates to be kept informed during the period between accepting the purchase order and the stated delivery date, but especially so, if there is any doubt that delivery could be delayed.

At an early stage in this process, the purchaser might still be able to accommodate a delay, but once the delivery time has arrived this becomes much more difficult, since the purchaser has invested time, money and effort to prepare for the arrival and subsequent sale of the products. Much or all of the goodwill towards the charity would be lost, perhaps permanently, if the purchaser is not kept fully informed. Conversely, a purchasing company will feel much more confident with accurate, honest and timely updates, supplied by the charity.

Before the date of delivery, a Delivery Note should be prepared in no less than three originals, listing quantities, part numbers, descriptions, total count of carton, and total weight of the consignment. The Delivery Note should also state the purchaser’s name and address, the purchase order number and date, and the place of delivery. This Delivery Note must be signed by the representative of the purchaser, or their authorized transport company.

Delivery Notes typically do not show the prices or the total value of the order, as they can move through different hands between the seller and the accounting of the buyer. Essentially the same type of form should be used for the invoice, which does not list the packing details and weights, but instead lists all agreed prices and the total value of the delivery. The invoice is typically sent directly to the purchasing company, especially in the case of local “ex warehouse” collection or “delivered warehouse” cases. Usually one copy of the signed Delivery Note is attached to the invoice as proof.

In case of delivery according to “FOB” or “CIF” modes of delivery, the forwarding agent arranging the freight, either for the charity or the purchaser, will supply a list of documents required, which could include a Certificate of Origin, or other such additional documents.

Payment Types edit

The Purchase Order should already have the type of payment listed, but apart from conventional payment by check or bank transfer to the charity on, or shortly after, delivery, some other payment types should be mentioned that would apply more to overseas deliveries. The various methods are also arranged from the most to the least favorable to the charity:

“CAD” – Cash Against Delivery is similar to local payment made by the purchaser. In this case the charity hands over the goods, invoice and delivery note to the buyer’s designated agent, and is paid immediately on presentation, usually through a bank.
“DAP” – Documents Against Payment. In this case the charity will have to prepare all required documents, such as delivery note, invoice, certificate of origin, bill of lading (proving the goods have been loaded aboard a ship or aircraft), and perhaps other documents previously requested by the buyer. These documents are submitted to the designated bank, together with a draft, and essentially contain the title to the shipped goods.
This method, facilitated through the banks, protects the charity and the buyer about equally, since the charity knows that they will receive the money as soon as the documents arrive at the buyer’s bank, whereas the buyer will know that the goods have been shipped and are aboard.
“DAA” – Documents Against Acceptance. In this case the same procedure applies to the charity, but the buyer will not pay on receipt of the documents at his bank, instead he only has to accept the documents. Payment will be made a stated time after the documents have been received by the bank, i.e. “DAA 30 days” would mean the buyer has 30 days to pay, which would be about the time the goods arrive at their destination.
Although the banks facilitate and safeguard the documents, the risk has shifted significantly towards the charity, since the buyer might not be able to pay on the agreed on date, although such an occurrence is very rare in case of commercial companies, since they would adversely affect their own financial standing.
“LC at sight” Letter Of Credit. In this case the buyer establishes the LC with the bank of the charity, listing very detailed conditions. Once delivery has been made, all required documents have been provided, and the LC has very literally been followed to the letter, the charity would be paid immediately. Although this method protects both parties equally, it is usually much too sophisticated to be followed by a charity, and should therefore be avoided, as even a very small mistake, typing error or non-conforming document could invalidate the LC.

It seems obvious from the above that during the discussions about the Purchase Order, the charity should quite rightly plead ignorance of the commercial terms listed above, and request “Cash Against Documents” if goods are to be transferred outside their location or country.

Because prompt payment is such an important aspect of a Livelihood Program, a sample letter or statement is offered below, which might be used by the charity to clarify the payment position: +++Suggested Sample Only+++

Payment Terms edit

Although our charity is aware of standard payment terms in international trade, such as payment on or sometimes after arrival of goods at the buyers premises, such extended payment terms would place a significant burden on any charity. By definition, charities operate on a "cash basis" since they cannot obtain trade credit for any materials or supplies used. Additionally, the structure of "Livelihood Projects", such as the ones employed by our charity in the production of saleable goods, absolutely require immediate payments to the workers employed, usually on the same day, or certainly within the same week.

We are very grateful for the time, effort, marketing, advertising, shelf space and other expenses incurred by our strategic partners, and in no way want to minimize such valuable contributions. However our charity respectfully requests 100% payment as soon as shipment from our warehouse has been made. Since all prices are quoted "ex warehouse" we also requests that shipping, freight, insurance, transit and clearing cost are covered by the buyer in order to avoid a further cash outlay by our charity. To protect bother parties, we requests the issue of an official Purchase Order from the buyer, prior to starting production, which shall reflect the quantity, description and price of each item, as well as the accepted delivery time and any other terms covering the shipment. We will confirm such Purchase Order by an Acknowledgement, showing the expected date of delivery. Our charity is a professionally run Livelihood Charity, well aware of the risks buyers might associate with shipments made by small suppliers, and therefore engages itself to ship quality goods in a timely manner, as promised. A Packing List and Invoice will be e-mailed or faxed, as per client’s preference, at time of shipment, and we respectfully requests that full payment takes place at that time.

+++

The general overview, which is an abbreviated form, has been provided so that the charity will recognize the terminology used by the buyer, and to enable the charity to be educated and understand the different methods that might be offered.

Financing and Cash-Flow edit

Although this might very well not be any part of a Livelihood Program, it is an important matter and is therefore included for consideration.

It is generally very difficult, for charities to get a commercial loan that would be intended to finance a Livelihood Project. Charities usually operate on a “cash basis”, but the effect of available finance, caused by a “ramp-up” of a Livelihood Project must not be underestimated.

A charity will need to consider, calculate and allocate the funds that will be required to initially finance production for any Purchase Order. Since money for materials, rent, transport and all other components, but especially labor, will have to be laid out, long before the ordered goods have been shipped and paid for, there could be a significant amount of financial strain developing.

While financing the R&D period can usually be easily done within the normal cash-flow of the charity, financing of production is another matter and deserves careful thought. For this purpose a simple cash-flow projection would be useful:

Take the initial costing sheet that was prepared and set to zero the indirect costs, as well as the Charitable Contribution. If other positions making up the product cost are initially provided free of charge, or covered already, (example rent or transport), set those items to zero too. Once the “free”, otherwise covered items, and the Charitable Contribution have been removed, the balance represents the “hard” costs for this item, as those will need to be paid out before the order has been delivered and paid for.

Multiplying these residual “hard” costs with the ordered quantities of products will yield the total capital requirement to fund the Livelihood Program. At the very least, these calculations must be produced to verify that the charity has the required funds available, since running out of money during production, especially of the first order, will very likely delay the delivery of the order, or even make the production impossible to start or continue.

Since the funding of each charity is somewhat different, this manual cannot really address a proper strategy to come of with the temporary funds required to start the Livelihood Program.

Conclusion edit

Although some parts of this manual might appear complicated, or even daunting, the spirit in compiling the information has been to be realistic, to foresee and point out potential problems, and, most importantly to be a practical guide for charity personnel, tasked with designing and implementing a Livelihood Program.

About the Author: edit

Roman F. Striebel has just retired as a successful serial entrepreneur, running at one time or other different companies on four continents. He holds an advanced engineering degree from a German Technical University, and has extensive post-graduate experience and training.

He lives and travels internationally, is married to Daisy, originally from the Philippines, and has a 21-year-old daughter at university.