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State of the sector: what is the outlook for charities?

Author: Kristina Kopic, Head of Charity and Voluntary Sector

Published: 24 Apr 2024

The state of the charity sector’s finances is constantly evolving, shaped by various factors including economic conditions, public finances and the generosity of people. By staying informed about developments, we can anticipate challenges and take action before it is too late. Drawing insights from recent reports and analyses, this article provides an overview of the current state of the charity sector and offers advice on how to respond to the key challenges currently facing charities.

Growing disparity between small and large charities

The Charity Commission's analysis of charities' annual returns for 2022, though inherently backward-looking, provides valuable insights into the financial landscape of the sector. While the overall increase in total gross income is positive, the disparity between larger and smaller charities is a cause for concern.

Larger charities, with greater resources and fundraising capacity, experienced growth in both income and expenditure. However, smaller charities (with income below £500k p.a.) faced greater challenges, highlighting the need for targeted support and capacity-building initiatives.  While, on average, smaller charities managed to increase their income by over 3 percent, expenditure rose by nearly 12 percent. According to the data reported in their annual returns, charities saw the biggest decline in government grant funding; the number of charities receiving such grants fell by nearly a quarter.

One of the critical issues highlighted NPC’s State of the Sector 2024 report is the underfunding of public sector contracts held by charities, which jeopardises the delivery of essential services. Charities routinely subsidise contracts for essential services and reported contributing, on average, 35 percent of the value of a contract. Moreover, only a quarter of contracts received inflationary uplifts.

Charity Excellence’s recent update also paints a sobering picture. The downward trend in sector resilience and fundraising performance signals potential challenges ahead, exacerbated by political and economic uncertainties. Whether the sector recovers in 2025 depends on the wider economic recovery and public sector developments. According to the report, it is likely that larger charities will be most affected by the cuts in public funding, especially as grants or contracts will come up for renewal in 2025.

Generosity of the Public: resilient but largely stagnant

The Charities Aid Foundation (CAF) UK Giving Report highlights the resilience and generosity of the UK public in supporting charitable causes, despite facing economic pressures. While it's encouraging to see some donors increase their donations, it's essential to delve deeper into the underlying trends to understand the dynamics at play. The rise in the average monthly donation size suggests that some donors are stepping up their giving efforts, perhaps in response to heightened awareness of social issues or increased engagement with high-profile campaigns such as the Poppy Appeal or Movember.

However, the stagnant typical (median) donation size raises concerns about the broader sustainability of donation income. At £20, the median monthly donation has been stagnant for the last seven years. Addressing this issue requires a multifaceted approach, including targeted fundraising strategies informed by data insights and harnessing connections as a motivator for giving to local charities.

NPC’s report also points to a growing desire for increased government-charity partnerships. It highlights the need for collaborative approaches to addressing complex social challenges. As the sector grapples with evolving demands and expectations, fostering trust and engagement among stakeholders will be crucial in driving positive change.

Suggested actions to boost financial resilience now

  • Facts are your friends. The better your understanding of income streams and the charity’s cost structure, the quicker you can act and cut costs, terminate loss-making activities, or increase income. Regular cash flow forecasts and management accounts will help you spot financial difficulties early and are just as important now as they were during the Covid pandemic.
  • Regularly review trends and developments in your charity’s revenue streams. If one income stream is declining, plan early how to replace funding from other sources. Use Charity Excellence’s free Funding Finder and Bid Writer to help your charity access new grants efficiently.
  • Target your fundraising activity effectively: use data insights to inform your fundraising strategy and augment your regular giving income with appeals that resonate with your supporters.
  • Capitalise on good relationships with existing supporters and ask for funding uplifts if full project costs exceed the income provided. If you can show transparently that projects are underfunded, your charity may be able to secure uplifts.
  • Actively pursue collaboration opportunities with other charities with the aim to maximise joint impact with limited resources. Partnerships between national and local charities could also help to serve high need areas more effectively.

As charity finance professionals or volunteers, we need to remain proactive in responding to emerging opportunities and challenges so that we can lead charities through the uncertain times ahead. Collaboration between charities, regulators, and policymakers will be essential in addressing systemic issues and building a more resilient and effective third sector for the future.