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What Microfinance Institutions Can Learn from Kids Company

by Paul Sutherland on November 10, 2015

Topics: Microfinance | Financial Reporting

Kids Company serves as an excellent example for Microfinance Institutions (MFIs) on the dangers of mismanaging financial and social reporting.

As widely publicised in the press, ‘financial mismanagement’ led to the government withdrawing its funding of the charity, which ultimately led to its liquidation in August 2015.

The similarities between charities and MFIs are evident – both serve the disadvantaged and operate as channels of donor funds.

Donors put their trust in them to use their funding for the social causes they outline. Clearly, there are lessons to be learned from the failure of Kids Company, and the microfinance industry would do well to regard them with an inquisitive eye.

So where did Kids Company go wrong?

A Trial and Error Approach

Kids Company began operating in 1996 and was very much a new breed of charity. Spearheaded by the flamboyant Camila Batmanghelidjh, it provided support to deprived inner-city children, growing from a simple drop-in centre in London to a charity with national outreach.

In its early days, Kids Company’s unconventionality and its infancy may have been the cause of its lack of performance management, and the government’s blind trial and error approach to funding.

But as the organisation grew in size and stature, it failed to evolve its back office. On a recent BBC Radio 4 programme, Director of Public Policy at the charity and social enterprise leaders network, Asheem Singh, hit the nail on its head – “Charities deliver on the frontline, but it all begins in the back office.”

Download our ebook Managing Two Bottom Lines here and learn how to balance  financial and social performance.

‘Where’s the Proof?’

Kids Company broadcasted some eye-catching statistics. For instance, it claimed to be supporting 36,000 children a year in 2011. But, fundamentally, it failed to properly measure and disclose its outcomes.

The charity didn’t have the reporting in place and consequent performance indicators that are needed both internally, to guide future operations and decisions, and externally, to demonstrate its effectiveness to crucial stakeholders.

In particular, what funders required was evidence of responsible financial governance and also evidence of social performance - ‘where’s the proof that our money is making a difference?’

As receivers of significant tax-payer funding from the government, and numerous emergency interventions, this casual approach to reporting really spelt the end of Kids Company.

Over 15 years, it received at least £42million in government grants, more than double the amount given to Barnardo’s, the UK’s largest children’s charity. It’s quite astonishing that its level of funding continued for so long. 

What Do MFIs Have to Learn?

As the case of Kids Company highlights, inadequate reporting can damage or completely destroy your reputation, severing your funding.

Both donors and investors need to see evidence of the ‘social good’ you set out to achieve and the respective measurable outcomes.

Also, of more salience to MFIs than charities, evidence of strong financial governance, including achievable ROIs for investors, is key to securing financial backing into the future.

Managing the ‘double bottom line’ – i.e. balancing social and financial performance – is an issue we’ve discussed previously. It’s a challenge all MFIs face and need to address, to keep stakeholders invested in the future.

We’ve created a guide on how to achieve this with standardised monitoring and reporting, and cost-effective management of impact investing.

Download guide - Managing two bottom lines. How Microfinance institutions can strike a balance between financial and social performance.

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