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Cost-of-living crisis hits charity sector hard

Author: ICAEW Insights

Published: 01 Sep 2022

Double whammy of increased demand and cost pressures including inflation, rising energy bills and falling donations mean charity leaders will need strong financial management and ingenuity to survive.

Charities are being forced to find efficiencies in their operating models as the cost-of-living crisis starts to impact on their income and concerns about financial viability escalate.

Increased demand together with a raft of cost pressures due to inflation, falling donations and burnt-out reserves following the pandemic are creating a perfect storm for the sector, with a third worried about their survival, according to analysis by the Charities Aid Foundation (CAF).

Alison Taylor, CEO of CAF Bank and Charity Services at CAF says with prices rising faster than they have done for 40 years, communities and families are feeling the effects. “Many more people are relying on charities, including food banks, mental health and disability support, and organisations offering financial guidance.” 

Rising bills are also taking their toll across the third sector, with 82% of charity leaders concerned about how they are going to pay their own utility bills, including rent, energy and fuel. Lourens du Plessis, head of client accountancy services at Stewardship, says: “Looking towards the winter, we know that churches are already working to provide warm refuge for people who cannot afford to heat their homes. Unlike households, though, charities are not protected through a heating price cap.

“Charities can’t pass on their costs to beneficiaries like commercial organisations can and rely on increased donor funding to cover those expenses – or dig into their reserves if they have them,” du Plessis adds.

As the growing crisis pushes many more people into poverty, Amanda Tincknell CBE, Cranfield Trust Chief Executive, says the need for charity leaders and managers to do more with less will become more extreme in the coming months.

Meanwhile, wage inflation is making it even more difficult to recruit and retain staff in a sector already struggling to compete with private sector salaries: “There has been a high level of job mobility since the pandemic, and many of Cranfield Trust’s client charities are finding it difficult to fill staff positions and are seeing higher levels of staff turnover. Some long-serving leaders are standing down – they’re close to burnout and deciding to leave before a further high-stress period,” Tincknell says.

However, most charities have less financially available to them; CAF’s research has found that 40% of charities relied on their reserves to help get through the last two years and one in seven regular donors are considering cutting back on donations in the next six months, while one in 10 say they have already chosen not to make a one-off donation. At the same time, inflation means that donations are not worth as much. Pro Bono Economics estimates that a £20 donation in 2021 will be worth £17.60 in 2024.

“Fundraising will be more challenging, with much more competition for funds – fewer people will be able to afford to donate to charities, and public funding will be stretched. The co-ordinated response of many grant-making trusts and foundations to the pandemic has not yet shown signs of recurring in response to the current crisis, and even if there are special funding initiatives, they won’t reach all the charities whose services are vital to people experiencing increasing hardship,” Tincknell says.

Taylor says charity leaders are going to need to use all their ingenuity to survive. “Financial resilience was a cornerstone of survival for charities during the pandemic remains the top priority as our research on trusteeships with ICAEW found. Organisations will have to find even more efficiencies in their operating models, and manage resources carefully, particularly any reserves. 

“Just like businesses and families, they will need to be practical in reviewing their discretionary spending and looking for savings in their energy use. They will also need to refocus fundraising efforts and maintain communication with regular supporters,” Taylor adds.

The current climate makes it all the more important for the charity sector to encourage all donors to make use of Gift Aid to increase the value of donations. Taylor believes that prioritising improvements to the Gift Aid process could deliver desperately needed funds. Every year more than £500m of Gift Aid tax relief is left unclaimed.

“The impact of the crisis also strengthens arguments to encourage more unrestricted funding, not tied to a particular campaign, so charities can decide where to invest their funds. Larger donors who are already providing grants could consider committing a top-up for inflation,” Taylor says. 

“We are also pushing for the government to look at this issue in detail to understand the multitude of ways in which charities are impacted and ensure any support packages or tax adjustments for the private sector extend to the charity sector too,” Taylor adds.

Du Plessis agrees: “As charities are expected to play an ever-increasing role in helping to alleviate the effects of the rising cost-of-living crisis, it’s imperative that we include them in any support measures possible. We can do more together.”

Tincknell says timely access to advice and support is key: “When some charities contact us about their financial position and to discuss how we may be able to support them in moving forward, sadly it is sometimes too late. I would therefore urge charities to take action now.”

In times of crisis, charities often experience an increase in giving, Du Plessis says, “but the past is not a guarantee of the future, and we know many charities experience concern and uncertainty about how their charitable funding will hold up during this time as their donors experience their own financial pressures.” 

Navigating difficult times: Cranfield Trust advice for charities

  • Gather information: look externally for information on the economy and operating environment, and for ideas and options; look internally at financial information to support decision making.
  • Forecast: routinely prepare cash-flow forecasts. Mapping cash flow against reserves policy helps to focus decision making.
  • Generate income/cut costs: minutely examine expenditure, and to explore all possible options for income generation.
  • Make timely decisions: information and forecasts help leaders to make decisions in good time. Making big changes is better done in a planned, supported way than in crisis.
  • Collaborate: working with other organisations – even outside of the charity sector – can help to reduce costs, streamline services and share overheads.
  • Focus on services, not organisations: think about the most important things the charity does, and the most efficient way of achieving them. It’s time to be ruthless in prioritising key services.

The ICAEW Charity Finance Professionals Community is open to everyone, including non-ICAEW members.

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