The cost of living crisis is piling pressure on charities from all directions.
For many, demand for what they do has increased, while galloping inflation has hiked up the cost of providing those services.
Meanwhile, the proportion of people donating to causes has not returned to pre-pandemic levels – and the value of money in the bank is being eroded all the time.
The Charities Aid Foundation found recently that only 31 per cent of charities had high confidence in their current funding, while half had used reserves to cover day-to-day running costs. More than half (53%) were concerned about struggling to survive – rising to 71% among charities providing care and support.
In the face of such pressures, many charities are reviewing everything they do and how it can be funded.
Charity Commission advice on the cost of living crisis
The Charity Commission reminds trustees of their duty to act in their charity’s best interests and to take account of the risks involved in any decisions about the organisation’s future.
For charities which can currently continue to operate, it suggests they consider these measures:
- Minimising costs – for example, by ceasing non-essential outgoings, finding cheaper ways of operating, collaborating with other organisations, reallocating staff to top-priority tasks and negotiating with any lenders.
- Reviewing any funds that could be released – chiefly reserves which are not restricted to particular use.
- Conserving or improving income – for example, asking for leeway from existing funders, starting an emergency appeal or seeking new funding.
- Addressing financial difficulties in trading subsidiaries and deciding whether such a subsidiary can be temporarily supported.
- Managing fuel costs by ensuring the charity is receiving relief on energy bills and is paying the correct rate of VAT on fuel.
- Considering mergers or collaborative working with other charities.
- Seeking financial support and guidance from organisations such as the National Council for Voluntary Organisations, the Institute of Fundraising, the Directory of Social Change and Charity Finance Group, as well as from local sector support.
Beyond these steps, there are questions which charities can ask themselves as they seek to put themselves onto a more sustainable footing.
How charity finance directors can help address the cost of living crisis
Charity finance expert Mark Salway has a host of advice for non-profits.
He emphasises the need for finance directors to help charities plan around predictable income streams, without which the organisation will always be thinking about survival rather than growth.
FDs must also be able to focus and prioritise ruthlessly, he says, and ensure resources are sufficient for the future. They can help their boards work on a sound financial strategy.
The question of overhead recovery also plays a central role, he suggests.
Only a third of charities know their own overheads and are good at recovering them when bidding for funding, according to a report by Cass Centre for Charity Effectiveness.
But if a bid does not include a fair contribution to overheads, the charity is subsidising a shortfall – and needs to know where that money will come from.
Mark has written in Charity Finance: “Many charities are still applying for grants with too little overheads, or costing their services with no surplus or profit.”
He added: “If you’re costing for breakeven, or putting in grants at breakeven level, where does the profit come from to evolve, try new things and invest?”
Is your finance function fit for purpose?
“Charities need to consider whether their finance function is fit for purpose,” wrote Mark Salway and Natalie Boughtflower in an article for Charity Finance before the current crisis.
“Do trustees have the right information, at the right time, to give their organisations the edge in the competition for funds? Could organisations better utilise technology to provide quality decision-making information rather than transactional processes?”
They pointed to RSM’s Funding and Functionality Research, which found 40% of charity finance teams were spending more than a third of their working time each month on transactional processing.
“The picture is that transaction processing is the focus of much work in the charity sector and that it takes significant manual intervention and a lengthy month-end process to provide reporting,” they wrote.
That is very different from the commercial sector, where teams are changing the way they work to deliver faster, more accurate, and insightful analysis and reporting, the authors argued.
They also cited research from PwC found around 35% of time and costs could be eliminated in processing areas, including general accounting and budget forecasting, through “streamlining process, technology and adopting lean processes”.
Without the right infrastructure, charities will be unable to invest in their future sustainability and seize commercial opportunities.
Covid exposed the weakness of many charities’ systems. In the absence of cloud technology to enable remote working, some charities could not make payments without someone going into the office.
During the pandemic, many needed to see financial information which was not available without staff spending weeks extracting data using complex spreadsheets, Mark has pointed out.
Organisations need better systems and “fast close” technology, so that financial processing does not have to wait until month end and is good enough for someone to press a button and see the financial picture at any point, he argued.
It might sound counterintuitive to spend on “back office” functions when money is tight, but there are often reserves which could be invested in these areas in order to reap long-term benefits.
“The cost of living crisis presents an existential threat to some charities.
The Charity Commission’s advice broadly correspond to the five basic options that Mark Salway identifies for charities under pressure:
- Grow income;
- Cut costs;
- Seek greater efficiency
- Improve cost recovery;
- Reimagine the organisation through a new way of working, digital transformation or partnerships.
Those non-profits which find a way through the current crisis may also be able to put themselves on a stronger footing, ensuring they can grow sustainably and better deliver on their core purposes for years to come.
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