The current cost-of-living crisis, coupled with continued high energy prices coming so soon after the covid pandemic has caused significant issues for Charities and not-for-profit entities that rely on donations and fundraising to generate income.
Many charities rely on this income not just for their charitable work but also to keep the lights on!
Despite this backdrop of reduced funding, charities have been and are likely to continue to be inundated with requests for support. This higher demand and lower funding causes charities to make difficult decisions about who to support, the use of reserves and in some instances whether they are a going concern.
A recent survey by CAF suggests that 58% of people plan to cut back their charitable donations over the next six months, however, 57% of charities have seen a rise in demand for their services with nearly 50% of charities now concerned about their future.
These numbers suggest that there is a very difficult period ahead for the charity sector!
So, what can a charity do?
Firstly, trustees must ensure they continue to make decisions in the best interest of the charity, acting prudently and with reasonable care and skill.
Secondly, trustees should ensure they have a clear understanding of the financial position of the charity, key elements of this include:
- Budget: have a clear and easy to follow budget. Compare this budget to actuals on a regular basis and identify plans to manage any deficits.
- Cash flow forecasts: whilst a charity may generate a surplus, if the cash flow is negative, they will not be able to survive very long. Prepare and monitor cash flow forecasts to highlight periods of difficulty and then plan how to manage these.
- Restricted funds: be aware of what purpose funds are held for. Restricted funds are good for project funding but are unlikely to be any use when looking to pay rent or general salaries. So, ensure the budget and cash flow forecast show what funds are restricted as otherwise there is a risk of using restricted funds to cover unrestricted costs.
- Endowment funds: where a permanent endowment fund is held, changes from the Charities Bill issued in 2022, mean that a charity can borrow up to 25% of the permanent endowment fund without Charity Commission approval. This offers financial flexibility and could increase available funds in the short-term, however this is only a loan and will need to be repaid to the endowment fund in time.
Thirdly, if you receive donations subject to gift aid, please ensure the gift aid is claimed on a timely basis. HMRC estimate that around £500m of gift aid goes unclaimed each year, this is a huge amount of money that could be utilised by charities, so do not be one of those charities missing out.
Finally, trustees should have a detailed and up-to-date risk assessment with plans to manage significant risks which should include financing in the current economic climate.
Whilst a charity’s focus is normally on the charitable work it undertakes, it is important not to forget the staff working for the charity, with many of these being key to charity’s success.
Charity staff have been facing and are likely to continue to face a period of increased pressure and stress, as they continue to get more requests than they can help and face making tough decisions on who to help or not.
Let’s not forget that staff are caring and not being able to help people in need will be deeply upsetting, especially if previously there has always been ample funds available. This will cause stress and could have an impact on their own mental health.
Furthermore, many of the staff will face personal issues with the cost-of-living crisis and high energy bills impacting their own personal finances. With charities struggling for funds there is likely to be little prospect of significant pay rises.
Trustees need to be aware of the additional stresses being placed on their staff and ensure there is appropriate support in place for them, for their mental health and finances.
Key funding considerations
Trustees and charity management should consider:
- What are we trying to achieve?
- Does anybody already provide this service / project? If so, is their room for us both or what do we offer that is better than their offering?
- Who is the target audience for the service / project?
- How will we fund the service / project?
- Who are our targeted donors / grant providers?
- Having an adoptive strategy when requesting funds from different providers.
- Existing supporters are cheaper and less time consuming to target than finding new supporters.
- How will we collect funds when undertaking public fundraising events? Consider contactless card readers, QR codes etc…
- Remember an appropriate Thank You to supporters goes along way to ensure repeat support!
Services under funding agreements
Many charities undertake and deliver service agreements in addition to other services and fundraising. These are often with for a Local Authorities or similar and will require careful considering especially when entering into an agreement for several years.
If you entered into a five-year agreement in 2019, the costs you forecast for each year are likely to be significantly lower than the costs actually incurred due to the current high inflation. This will lead to the charity undertaking the service at a loss and need to supplement this via either reserves or other fundraising.
Careful consideration of the costs over the entire service agreement is required, especially if the agreement spans several years. With high inflation and the cost-of-living crisis driving up salary costs, energy bills and other general costs, a service agreement could quickly become non-viable if costed incorrectly.
When looking to re-quote or tender for such agreements, please ensure the full costings are considered for each year and with a prudent inflationary rise to these costs. Whilst this can inevitably lead to the risk of overpricing and losing the agreement, this may be preferably to a loss leading agreement that results in the charity closure!
Remember that in the current crisis a clear funding plan is required and this needs to be supported by good quality management information. Know your financial position.
Having a good plan A goes a long way, but also have a good plan B is vital in case changes mean plan A is not viable. Be flexible and adapt to changes.
And seek appropriate professional advice.