Trading
Voluntary organisations, including registered charities, are perfectly able to trade (sell) goods and services to individuals on the open market, for example they might sell goods like books, or services like training. There is an important distinction though between two types of trading:
Primary-purpose trading contributes directly to the voluntary organisation’s mission or purpose (it is ‘on mission’): for example, an education charity selling a training course. The training course both meets the charity’s purpose of advancing education and also brings in income. Registered charities can do as much primary-purpose trading as they wish.
Secondary trading also known as Non-primary purpose trading is done solely to bring in money that can be used to fund the charity’s other activities (it is ‘off mission’): for example, an animal charity selling Christmas cards. There is no reason for the charity to sell cards other than to bring in money. There are strict financial limits though on secondary trading, and once those limits have been reached the charity needs to create a separate trading company and run the secondary-trading activities through that. The profits can still be transferred back to the charity, but it makes sure that the charity is protected from the risk if the trading activities go wrong.
Generally, it is much better to raise money ‘on-mission’. This is because it means that all the money the charity is spending is going towards achieving its purpose. It also means that if you aren’t successful at raising lots of funds, at least the organisation will have spent its money on charitable activities, not fundraising ones.
Secondary trading can be much more risky for a voluntary organisation, because when it goes wrong they can lose money and still not contribute to their purpose or mission. The examples below illustrate what the risks can be.
Box 1 When secondary trading goes wrong
A charity decides to raise money by producing Christmas cards, which will be sold to their supporters. Their head of marketing chooses the card designs and arranges for 5000 packs to be printed. It costs £10,000 to print the cards, which they sell for £3 per pack, hoping to make £1 profit from every pack sold. Overall this would give them £5000 profit, to be used to fund their work.
However, it turns out that the head of marketing’s choice of designs is not very popular. They only sell 50 packs, making just £50 profit on those sold. The charity has just spent more than £9000 of charitable funds on making Christmas cards that are not selling.
Box 2 When primary purpose trading goes wrong
A different charity decides to raise money by holding an auction of pieces of artwork designed by the disabled people they work with. They spend £10,000 arranging the event, booking the venue, paying for refreshments and hiring a celebrity to compere the event.
On the day they don’t raise as much as they’d hoped – only £5000 through the sale. However, the event is well attended by some wealthy individuals and some local politicians and proves to be a great chance to raise awareness of some of the challenges facing disabled people. It also gets quite a bit of media coverage and increases the confidence of the disabled artists whose work has been showcased.
As these two examples show, the primary purpose trading still has some clear benefits for the charity even though it hasn’t made money, whereas the secondary trading initiative was a disaster, costing the charity money and not furthering its cause.
Contracts