Research has revealed the “desperate challenges” facing charities which are providing services to the NHS and local councils. Many are doing so at a significant loss.
NCVO (the National Council for Voluntary Organisations) found almost three-quarters of charities lacked the resources to meet demand for the public services they have contracted to deliver, and the situation is getting worse.
It has launched a Cost of Giving Crisis campaign, warning that the situation could lead some charities to close down altogether.
The crisis has led charity finance expert Mark Salway to warn of a broken business model in the non-profit sector – and to set out the steps that organisations can take to address it.
What the research tells us
NCVO says charities which provide services for local authorities and the NHS are facing a crisis which is caused in part by “years of austerity and underfunded public services” and exacerbated by soaring costs.
Its research found 73% of charities could not meet the cost of the public services they have committed to delivering.
Services to support homeless people, autistic children and victims of domestic violence or sexual abuse are among those predominantly provided by charities, for example.
Sam Mercadante, NCVO’s Policy and Insight Manager, wrote: “While underfunding is not a new problem, the impact of continued high inflation has put charities delivering public service contracts at crisis point.
“The options are bleak: charities will either stop operating completely, cease delivering much needed services, or use charitable funds to subsidise public services.”
She added: “With charities delivering £16.8bn worth of public services each year, there are millions of people at risk of not having their needs met if support isn’t given.”
The problem with the charity business model
Charity finance expert Mark Salway says the soaring inflation of recent times has exacerbated a problem which already existed in the non-profit sector.
He has long argued that when charities apply for grants or take on contracts, many of them do not price their services at a level that covers a contribution to their overheads or to building for the future.
“Charities are mission-driven,” he says.
“They feel they have to take on these public contracts in order to have an impact on behalf of those they were set up to serve, even at a loss. This has been exacerbated with the cost of living crisis.
“These contracts don’t often cover full overheads, and certainly won’t include any money for innovation or to build for the future – but you still have to get that money from somewhere.
“Getting into these contracts may well be the right thing to do from a mission point of view, but you need to know how any shortfall is going to be filled.”
Good communication with the organisation that is funding the contract can be important, he says. Such contracts will tend to include break clauses – and the other party might be amenable to discussing the issue if it knows the arrangement is no longer viable for the charity.
But with the whole public sector facing spending cuts – and a number of local councils on the brink of insolvency themselves – the environment is harsh. Some authorities will be seeking to stop funding any services they are not statutorily obliged to provide.
Three key lessons for charities
Mark has three key observations on the current crisis facing non-profits.
1. It’s normal, but worse.
The situation this winter is consistent with the challenges Mark has been writing about for a long time. The problem has been baked into the business model which encourages charities to price their services without factoring in the effective cost and contribution to their infrastructure or development.
“It’s a huge problem and the cost of living crisis has made it more acute,” he says.
2. Shortfalls need to be addressed realistically.
CFOs need to be astute about working in a system that sees charities take on contracts that don’t cover their full costs.
“In the commercial sector, people would be realistic about making sure they have sufficient money,” says Mark.
“Charities need to do the same sort of thing. They might want to get into the contracts because of the impact they can have by doing so, but they really need to be clear about where any shortfall is going to be funded from.”
3. Running down the reserves is not the answer.
Many charities will be tempted to use their reserves to meet the gap between the cost of delivering public services and the money they’re receiving.
That may be part of the solution, but it’s an approach that needs careful consideration.
“You can’t afford to denude the reserves too much,” says Mark.
“You still need a prudent level of reserves, so using them to address a revenue shortfall needs to be carefully thought through as part of a broader strategy.”
That need for a strategy takes us to the key to running a sizeable charity’s finances successfully – data and planning.
The big take-away: strategy, data and planning
Charities whose purpose is to tackle some of society’s most urgent and serious needs can find it hard to look beyond their immediate challenges.
But Mark argues that planning is the key to dealing with many of the problems facing non-profits. Working on some good and bad scenarios and how your organisation would react under extreme stress, for example.
The added difficulty is that many charities simply don’t have the clear and current view of their financial picture that would help them do that planning.
The work of finance staff in many non-profits is dominated by laborious data entry and by tracking funding in spreadsheets.
Producing any meaningful management information and scenario planning can involve many hours spent manipulating figures in Excel, while presenting the data for different audiences is an ordeal. Often, the month-end process takes so long that the finance information is already out of date by the time the senior leadership can see it.
Charities need systems that automate as many of the lower-level, repetitive tasks as possible. Leaders need to be able to easily analyse costs and track spending of grants and funds. Even more importantly, they need to make decisions based on data that’s complete, correct and timely.
“We need to move from being reactive to being proactive – to planning ahead,” says Mark.
“However, you can only do that if you have the information to constantly re-project and re-plan.
“Being on top of the data and playing out different scenarios will really help for the long-term but it starts with tight systems.”
Find out more about iplicit