If accountants had any doubt about their vital role in shepherding charities through the cost-of-living crisis, it was dispelled last month at ICAEW’s 2023 Charity Conference.

In his opening address, Charity Commission Chair Orlando Fraser KC told delegates: “Your mettle may well be tested in the months ahead, as you demonstrate yet again the crucial importance of intelligent, prudent, purpose-driven financial planning and management. 

“Your work is the charity’s engine room, providing the fuel and energy required to deliver for your beneficiaries.”

As a widely forecast recession inches closer to reality, what are the main strategic considerations that charity accountants will need to keep front of mind?

Critical component

For Judith Miller, a partner at charity auditors and advisers Sayer Vincent, the first, crucial step is cost control: an area in which many organisations may have a head start: “When the sector came out of COVID-19, lots of charities were already quite pared down. But for any that aren’t, the run-up to a recession is definitely the time to take a hard look at whether you have rent reviews coming up, what your people costs look like and how inflation is likely to affect your running costs.”

As part of that effort, Miller says it is vital for every charity to have a clear understanding of its cash position, supported by thorough cash forecasting: “What’s your bank account going to look like in X months’ time? How many months’ running costs are left in the tank? Given current pressures, think about whether the regularity with which you update this information and share it with your management and trustees is adequate.”

Risk analysis is a critical component of the forecasting process, Miller notes. Are you confident that the sums of money you are expecting from your funding sources are going to land on schedule? And could there be any unwelcome surprises on the cost side, too?

“I use the term ‘income pipeline,’” she says, “particularly for organisations that rely on trust and foundation grants, and/or contracts with local authorities. Look at any multi-year arrangements you have: when will funding end? When are those contracts up for renewal? When are you putting new bids in – and what’s the timeline on the funder’s decision-making process? Your pipeline must map out lead times on all hoped-for funds, and also provide indications of likelihood.”

Human dimension

Sitting alongside this detailed, financial management work, charity accountants must take some broader measures, too – starting by maintaining good relationships with their funders, Miller believes.

“You may have funders that have supported you for years and will not want to see you collapse,” she says. “Some may be happy to help with more money if needed. Others who provide restricted funds, to be spent on specific projects, may be persuaded to switch to unrestricted funding or even an alternative project. If you are completely transparent with them about how your finances are looking, funders will have a clear understanding of your needs.”

In tandem, charity accountants must help their senior teams to constantly re-examine and re-evaluate their organisation’s fitness for purpose. “Regular self-reflection is vital,” Miller stresses. “Ultimately, it’s not about the survival of the organisation, but delivering on its charitable objectives. Keep coming back to: are we best placed to deliver X? Should we deliver X in a different way? Are there some things we should stop doing? Should we collaborate, shrink, grow – or even merge? Although I should point out that mergers are complex endeavours.”

Above all those questions is a need for senior teams to address the human dimension. “These are all highly emotionally charged decision points,” Miller adds. “In the context of charities that are facing difficulties, I’ve started to refer to the Kübler-Ross curve of grief or change. Thanks to their specialist insights, finance professionals will be further along that curve than other staff, and will also be making huge efforts to bring colleagues and stakeholders along with them. So, accountants will be first in line for shock and realisation – and must then, in turn, lead others to that place. That demands significant wellbeing provisioning.”

Boosting impact

Outside the nuts-and-bolts actions that accountants can take within their charities, what sorts of macro initiatives would help to support the sector as recession looms?

CEO of Pro Bono Economics Matt Whittaker is calling for a number of measures on this front. He recently contributed to a report from the Law Family Commission on Civil Society that urged the Financial Conduct Authority to make philanthropic advice training mandatory for all financial advisers. This plea aims to tackle what he sees as a major, sectoral challenge: matching supply to demand.

“At present, we have patches of oversupply and undersupply, leaving areas of unmet need,” he says. “So, how can we help high-net-worth (HNW) individuals navigate this organic space of 150,000 UK charities – all of different sizes and doing very different things – so they can understand how to make the greatest impact?” 

In Whittaker’s view, this is a particular concern in relation to HNW individuals who have made their money in business and financial services, and are well-versed in metrics, backing winners and knowing what success looks like. “Those things are much harder to pin down in the social sector,” he notes, “so there’s definitely a role for wealth advisers to play here.”

Pro Bono Economics is also calling for a government-based philanthropy champion, supported by counterparts in every Whitehall department and others in local authorities. “In central government, this system will enshrine philanthropy as one of the first points of consideration in decision-making processes,” Whittaker says. 

“Meanwhile, at local level, it will create a race to the top: with their own champions driving the agenda, councils will say, ‘We want our area to be the place that HNW individuals flock to and invest in to create regeneration and answer other needs.’”

Alongside these initiatives, Whittaker believes the UK charity sector must dramatically improve how it collects and uses data on its effectiveness. “The more we build out that architecture and infrastructure for assessing the sector’s impact, the greater that impact will be.”

ICAEW Head of Charity and Voluntary Sector Kristina Kopic says effective financial management has never been more important for charities: “With stagnant income levels and rising costs, many charities are now struggling to meet the increased demand on their services – and unfortunately, we expect to see more charity closures. It is critical that charity finance professionals and trustees frequently review the assumptions underlying their cash-flow forecasts and evaluate risks inherent in their charity’s business model.

“The economic situation has led some funders to provide more core finance and help charities bridge gaps left by the shifting statutory funding landscape,” she adds. “As a result, many grant funders are now more flexible and support charities with lower levels of reserves – but they will need to understand the charity’s longer-term financial strategy. It is therefore vital that charities explain their financial viability in their annual reports.

“Meanwhile, trustees may be able to harness the power of existing funding relationships or utilise their personal networks to attract new supporters.” 

Further reading

• The Charity Commission has issued a special guidance paper on managing charity finances during the cost-of-living crisis
• If you are a finance professional with involvement in the charity and voluntary sector, why not join ICAEW's Charity Community to stay up to date with the latest developments in charity finance, taxation and governance. Find out more