Funding fundamentals

The information most frequently asked for by funders is contained in a ‘business case’. Understanding what a business case is, what it consists of and having the ability to write one will provide any organisation with the means to make a compelling case for investment.

A business case is the justification for a project, programme or role. It is a written or verbal value proposition intended to educate a decision maker and convince them to take action. It typically contains costs, benefits, risks and timescales, and is the preferred approach of many funders to test whether projects, programmes and policies are viable.

The UK Government places significant emphasis on the business case as a way to appraise and evaluate policies, projects and programmes to be funded from the public purse. Local authorities use a similar approach. As much of the funding available to LVEPs is public in origin this section deconstructs the business case into five component parts, or cases, and suggests what is usually required under each heading. Not all opportunities will ask for a full business case but an understanding of all the components is good preparation to respond to a wide range of funding opportunities.

Note: Sometimes the term business case is used as a stand-alone rather than an umbrella term for all five components. Where this happens, translate the term business case into economic case.

For definitions of many of the terms included in this section refer to the jargon buster.

The purpose of the economic case is to show value for money, to society and/or the funder. Value often includes wider social and environmental effects as well as financial.

What to think about:

• What does value mean to the funder. It could include, for example, economic growth (volume and value), productivity in the sector, jobs created or protected, quality of life for host communities, a tangible contribution to net zero targets.  
• What will your proposal contribute to what the funder values and how you can prove cause and effect.
• Setting targets and making sure they are realistic. It is tempting to exaggerate the outputs and outcomesyou promise to deliver in order to secure funding, but this can backfire if they are unachievable from the start. It could look like failure and affect your ability to secure future funding, or in funding claw back.
• Whether you have baseline information against which you will measure the impact of funded activity. If you don’t, it will be difficult to convince funders that what you are proposing will have the desired effect.
• Options to put in front of the funder that make the case for them to choose your preferred option. Consider how well each option meets the spending objectives and critical success factors of the project, programme or role. If you are asked to produce an options appraisal, include at least three options: business as usual, minimum necessary and preferred option.

Useful words:performance measures (or outputs), opportunity cost, return on investment, outcomes, impact, job creation, productivity.

Tools to use: options appraisal, SWOT analysis. 

 

Options appraisal

An options appraisal is useful to answer the ‘so what’ question. It is a way to demonstrate why your proposal is important and is usually included as part of the economic caseor as a stand-alone requirement. If you are producing an options appraisal the three options that you should include as a minimum are:

1. Business as usual/do nothing.
2. ‘Minimum necessary’ to meet essential requirements of the fund or funder.
3. Preferred option, what you want to deliver.

You can include other options, for example ‘Limited investment’ which fits somewhere between options 2 and 3. For each option include some or all of the following elements as appropriate, all of which are outlined in the sections above and/or supported in the Tools and Templates section:

• Benefits identified through a cost/benefit analysis.
• Risks to the funder, the project, programme or role and how they can be mitigated, often identified through a risk assessment.
• How you are going to measure and monitor benefits and associated risks
• The return on investment for the funder.
• How you can demonstrate value for money: this can be challenging to assess and demonstrate, particularly when delivering a service, but you should try, for example are the costs less because of your existing knowledge or relationships.
• The opportunity cost, which means opportunities that are forgone or missed as a result of choosing one approach over another.

Sometimes called a financial plan, the purpose of the financial case is to demonstrate that a proposal is affordable and fundable.

What to think about:

• Check that the costs of the activity are eligible. For example the funding may pay for activity and a proportion of your fixed overheads but not staffing.
• Be clear about your VAT status and reflect it in your finance tables (see note below).
• Be as accurate as possible. Get cost estimates for each item of expenditure. Funders may ask about the basis for your budget, and you need to be able to produce the paperwork.
• Don’t underestimate costs. Trying to make the budget look less than you really need could lead to financial problems that affect delivery and funders will be concerned if they think you are not being realistic.
• Don’t overestimatecosts, it can lead to your application being rejected. If it is accepted, and you don’t spend your whole grant, it will make you less likely to get more funding in future.
• Organise the costs of activity into direct, indirect costs and intangible costs.You may be required to separate them out in the submission. People can be categorised as direct and indirect costs, that is, those working directly on delivery and those acting in a supporting role e.g. recruitment, finance, monitoring, etc.
• Include full staffing costs such as employers’ National Insurance contributions and pension costs.
• Provide a clear breakdown of what the fund is paying for and what other funders are covering including the type of contribution they may be making, for example cash co-financing and monetised in-kind funding. If there are funding gaps at the time of application be clear where they occur and also how you plan to bridge the gap. Shortfalls in funding should appear on your risk register.
• If applying for multi-year funding, recognise the risks and impacts that may be relevant. Many funding schemes that are multiyear will ask applicants to profile budgets and require grant money to be spent in the year it is allocated to. Sometimes underspends can be carried over into the next year, but not always and permission will usually be needed.
• Check you can cash flow the activity. You may need to pay for goods and services up front and claim grant money retrospectively.
• Pay attention to the intervention rate. Make sure that your total ask of the funder falls within the threshold.

Useful words: cost effective, overheads,cash co-financing, monetised in kind funding, intervention rate. 

Tools to use: finance table, staff day/hour rates, VAT status statement.

Note: About VAT and VAT recovery:

In an application it is important that organisations understand and take account of the cost of VAT and reflect how it will be handled.

Grants are usually provided as a gross cash amount and any irrecoverable VAT associated with items of expenditure has to be accounted for within the allocated grant. This is because HMRC categorises a grant as non-business income.

Applicants need to be clear about their company’s taxable status and their VAT recovery agreement with HMRC to determine their ability to recover VAT on expenditure incurred by delivering grant funded activity. A further consideration relates to procurement of services from an overseas-based supplier which may bring in to play the VAT reverse charge.

Organisations that don’t take account of VAT in their financial planning at the application stage may find that they have a budget shortfall and have to cover the cost of irrecoverable VAT from their own resources.

VisitBritain recommends that any applicant that is unsure about their VAT status, or how to handle VAT, should seek professional advice. Funders, including VisitBritain, are not able to advise applicants on how to handle VAT.