Managing charity finances through uncertain times

• The funding challenge  

  Key findings

  • Half of respondents say that there has been no change in their total income levels over the last 12 months, while a further 31% have experienced a less than 10% fall overall
  • 36% have seen a drop in government funding, with 65% anticipating a further drop in the next 12 months
  • 93% have experienced a fall in investment income and 55% expect a further decrease over the coming year

  Sources of funding

  Encouragingly, charities are demonstrating a healthy resilience in tough climates and the effect of the recession has been contained to a less than 10% drop in total income for 80% of respondents. Indeed, half of those surveyed reported no change in funding levels. However, secure and sustainable funding is a challenge at the best of times. Charities are bracing themselves for a challenging and competitive funding environment over the next twelve months, with 61% predicting a change overall.

  Not surprisingly, the area of greatest concern is government funding, which is now the single biggest income source across the entire charity sector. Cuts in public spending will reduce the amounts local authorities have to spend on public services. Over a third of respondents have already seen a reduction in government money, with nearly two-thirds anticipating a further drop in the next 12 months. However, the reality is more complex. While services, and therefore funding, are being cut back significantly in some areas, there will be opportunities for others, such as charities dealing with the unemployed.

  With equity performance as it was during the period in question, it is perhaps not surprising that 93% of respondents reported a drop in investment income, with 61% recording a significant fall. Organisations holding cash have also been affected through the fall in interest rates. However, there is some optimism for the coming year, with only 15% expecting a further significant decrease and 40% expecting a slight decrease. This seems to demonstrate a feeling that the worse is over as markets continue to recover – albeit slowly.

  There is conflicting evidence and some debate generally about the recessionary effect on individual donations. Recent figures published in the UK Giving Survey 2009 revealed an 11% fall in the overall figure. In our survey, while 41% of respondents reported a fall in individual donations – with 9% saying it had been significant – the majority have seen no negative effect. Indeed 11% reported an increase. Looking ahead, expectations are for a similar story in 2010. However, with unemployment as high as it is, concern must still surround giving levels and membership numbers.

  There is understandable pessimism surrounding corporate giving. 39% of respondents have seen a decline in this stream and slightly more expect further reductions in the next 12 months. In a tough business environment, charitable giving is often one of the first things that companies review. However, there may be an opportunity to boost volunteer numbers by taking advantage of corporate social responsibility policies that shift focus to giving time rather than money.

  Our survey confirms that legacy income is less exposed to the short-term drivers that affect donations, and with the housing market recovering, the fear of a knock-on effect upon estate values of house prices plummeting seems to have abated.
  
  Nearly two-thirds of respondents with non-charitable trading operations have seen no change in income and slightly more expect a similar story over the next year. This includes charities with shop chains, and while tighter budgets have undoubtedly led to more people turning to charity shops, the flip side is that people are donating less and/or lower quality goods as the economic climate impacts upon consumer spending.

  Now more than ever, it is important for charities to review their funding strategies. Where appropriate, they should try to identify new and sustainable income streams to avoid an over-reliance on one source of funding. At the same time, charities should investigate partnerships and other approaches to achieving operational efficiency, for example, by renegotiating agreements and reviewing specific project costs.

  Things to consider

  • Review your funding mix. Are you over-reliant on one stream?
  • Is the government funding you receive for activities core to your charitable objectives?
  • Do you have multi-year contract funding or one-off grants that may soon be up for renewal?
  • How might you meet any shortfall in an income stream?

• Managing your finances  

  Key findings

  • 8% of respondents only produce management accounts on an annual basis
  • 30% of trustees receive information monthly
  • 10% of respondents are reducing staff salaries and 31% deferring planned or existing projects
  • 58% of respondents have not heard of the Compact, a document on the framework of how charities and government should work together

  Financial information

  With uncertainty surrounding the funding position of most charities, the importance of timely, useful and accessible financial information is paramount. In this climate, trustees and management teams must be adaptable and be able to make decisions quickly – otherwise opportunities will be missed and costs may increase. The lack of management information and limited understanding of the more commercial aspects of a charity’s service offering is a big issue. In general, it seems that good, regular management information is being produced by respondents – although whether it is being properly understood and acted upon is harder to determine.

  Nearly two-thirds of respondents produce monthly management accounts for monitoring purposes, which are in the main passed to the trustees on a quarterly basis, although over a quarter of trustees receive reports monthly. At the other extreme, 8% of charities produce only annual management accounts and 16% an annual cash flow.

  A balance needs to be struck so that trustees receive the salient financial information to enable an overall view of the activities of the charity, without being swamped with time-consuming and superfluous detail. There is no definitive right or wrong guide to the correct frequency of reporting, but trustees and management must put into place a process, dependent upon the size and complexity of the organisation, to ensure trustees have a clear picture of the charity’s financial position. In general, any reasonably-sized organisation with an income of £1 million to £5 million should be producing monthly management information, which will not only report on finances, but also on other key performance indicators.

  Cost reduction

  A charity needs to assess whether its staff have the correct level of skills to carry out its activities. So whilst it is good news that charities are reviewing their cost base, the bad news is that 10% are making staff salary cuts and nearly a third are deferring projects. This is particularly worrying in terms of third sector public service delivery at a time when there is increased beneficiary need. Local authorities are increasingly using charities to provide care, youth and educational services, to name a few.

  For nearly a quarter of respondents, making a full recovery on the cost of service provision is getting worse. This means they are at greater risk of operating at a loss, which will ultimately drain reserves. Charities need to be realistic about their relationship with government. They should avoid the danger of providing services on the cheap and should build full cost allocation into budgets. We have seen the devastating impact on charities that continually fail to do so.

  With this in mind, the importance of such tools as the Compact is high. The Compact is a document which provides a framework for how charities and government should work together. Yet 59% of respondents have never heard of it and only 8% have found it useful. The Compact is currently undergoing a refresh to make it more effective and encourage awareness, so now is a good time to see how it can be used to improve charities’ relationships with local authorities and central government.

  Things to consider

  • In the current environment, is the financial information you provide to trustees appropriate?
  • Does your charity have the right mix of skills to carry out your current activities?
  • Are you getting a fair price for service provision?
  • Are you aware of the Compact? Can it help you?

• Taking action  

  Key findings

  • 60% of respondents regularly review performance against forecasts
  • 61% are or have been seeking new sources of finance
  • 32% have or will be increasing fundraising activities
  • 36% are or have been considering a merger/joint venture with other charities

  Reviewing business basics

  So in light of the challenging economic climate, what action is being taken by charities and what else should they be doing? A worrying 62% of respondents have not heard of the Charity Commission’s Big Board Talk and only 12% have found it useful. Launched in June 2009, Big Board Talk is described by the Commission as ‘the conversation all charities need to have’ if they are to survive the recession. It asks 15 key questions to help trustees assess both the options and opportunities available to them. It is very important to examine the business basics regularly. Nearly 60% of respondents regularly review performance against forecasts. Regular monitoring of cash is key and charities should be aware of their break-even point. Reviewing major costs such as staff pay, which over half the respondents have, and benefits, insurance, professional advisers and procurement of related services can result in savings.

  Only 6% of respondents have reviewed creditor arrangements and 17% debtor terms. Charities need to make creditors work for them by utilising credit terms and negotiating payment plans for the larger ones. Conversely, debtors should be chased and all payments invoiced and collected on time.

  Organisations need to know all of their liabilities, including the contingent ones. It is also vital to maintain strict controls over restricted funds to ensure they are not utilised for general costs. Most importantly, charities should keep lenders and funding partners informed if there is a problem. This gives them more chance of finding a solution in the short-term.

  Only 39% of respondents have reviewed their risk register. Risk profiles change in recession times. Every charity should review their risks and also compare notes with other charities in a similar field to discuss how to tackle these.

  Proactive steps

  As well as reviewing the current position, there are a number of proactive steps to consider. 61% of charities have been or are seeking new sources of finance. This can be a good opportunity from which to get outside input, as often those closely involved cannot see the wood for the trees and need to take a step back.

  Nearly a third have or will be increasing spend on fundraising activities. In a highly competitive environment, while each charity has its loyal donor base, a squeeze on the amounts donated means considering new and innovative approaches. This could include, for example, developing practical outcome measures such as economic impact assessments or social return on investment.

  Over a third of respondents have conducted or are considering a merger or joint venture with other charities, but only 15% with commercial organisations. Merger activity certainly looks set to increase and reflects what has been happening in the wider economy. Merger does not always mean a full legal merger of organisations, but could be collaboration on projects or joint ventures of related activities, project partnering, or grouping. Last year’s Baker Tilly Voluntary Sector Governance Survey indicated that most mergers and partnering arrangements achieve their objectives, so it is a definite area to consider. However, anecdotal evidence suggests that in smaller organisations particularly, trustees and CEOs seem reluctant to merge due to conflict of objectives, fear of losing control, potential staff reductions and an overall reluctance to expand.

  Business reduction

  22% of respondents have, or are looking to, reduce projects and 11% to close down operations. In such cases, trustees need to be mindful of issues such as employment consultation periods, contractual obligations and property leases to ensure a smooth wind-down of activities.

  6% are looking to sell key assets to raise funds such as properties, although asset values have reduced significantly. Careful consideration around the charity’s values and objectives need to be considered, as well as compliance with the Charities Act requirements when selling or mortgaging property.

  The current times present the opportunity for charities to also examine whether they should be providing their services at all. It is worth considering social impact evaluation to justify the retention of government funding. Charities also need to understand their core services. There can be a temptation to diversify into unknown areas just because there is funding available. Plan well and understand all of the risks. Experience shows that some management teams do not understand the contractual obligations that entering into service contracts gives them and can enter into sectors where they have little experience.

  Things to consider

  • Have you looked at the Big Board Talk?
  • Do you regularly review performance against forecasts?
  • When did you last review your risk register?
  • Have you considered mergers and partnership arrangements?
  • If planning a merger, have you considered issues such as debtors, lease commitments and pension liabilities?
  • Is there an opportunity to review and re-negotiate contracts?
  • Whilst reducing services is an option, have you considered associated costs such as redundancy or contractual costs?
  • Keep lenders and funding partners informed if there is a problem.

• Outlook  

  Key findings

  • 90% of respondents are not currently seeing a significant improvement in the economic climate for their charity
  • 45% of all respondents are not expecting an improvement until Q4 2010

  Economic outlook

  With 90% of respondents not currently seeing any significant improvement in the economic climate for their charity and 45% are not expecting any positive change until the last quarter of 2010, charities will need to constantly review their market position and take steps to control their finances, while ensuring that their overall aims and objectives are met.

  The biggest challenge to the sector is the expected drop or delay in government funding. There will be a subsequent need to raise additional funds to meet both this and the fall in investment income and donations. As unemployment rises and people are concerned about their jobs, the sector foresees a reduction in personal giving and a fall in membership numbers. Charities are also nervous about the effect of the general election and the stance of the political parties on public funding.

  Wish list

  When asked what changes they hope to see, a number of perennial concerns and issues are cited. The perceived unfairness of the VAT system, where charities are estimated to lose out on up to £0.5 billion in irrecoverable VAT, is a major gripe. There are also calls for government to bring in better tax reliefs and grant concessions and improve the gift aid system.

  Full cost recovery on government projects and less red tape and bureaucracy are common concerns, as is receiving an understanding from society that the third sector is not second rate. Charities want recognition of the valuable services they offer.

  There is also a need for a greater willingness for people to get involved with charities and bring their knowledge and commercial acumen to the sector.

  Long-term survival

  While 12 months can seem a long time, charities need to look beyond that. They should prepare a business plan for the next two to five years – and test the plan. What are the charity’s objectives and what is needed to achieve them? Charities should produce best and worst case scenarios, which should result in a realistic middle ground. Charities considering offering new services should undertake ‘what if?’ scenario planning to see if their current business models and forward strategies are feasible. If not, what can be done to improve the situation? They should always be realistic in planning and not overly optimistic. While it would appear that the economy may be improving and the third sector is coping relatively well, it is prudent to plan for a continued downturn.

  To meet a shortfall in income, reserves will start dwindling and must be managed carefully. A long-term business plan may not support the spending of ‘rainy day’ funds. Investment will be required to maintain and develop growth of services. Charities should explore investing in fundraising activities. All organisations will be competing for limited resources so charities should make sure that their organisation is at the top of the funding pile – whether from the individual or corporate giver or the grant issuing body.

  The next 12 months will be tough times for senior management teams and trustees. To ensure that they survive, they must understand and acknowledge any problems that their organisations face and put plans in place to counteract the anticipated fall in funding, whether from government or expected income. However, they must also remain open to new opportunities that arise in these times and not batten down the hatches to the extent that they become solely internally focused. It is a good time to make alliances, join forces and develop the services to provide long-term opportunities for their organisations. Whilst the sector will be experiencing difficulties, if the challenges of today are managed in the correct manner, it should result in a stronger organisation emerging from these uncertain times.

  Things to consider

  • Are you planning beyond the next 12 months?
  • Is now the time to invest in fundraising and explore new approaches?
  • Have you considered the impact a change of government might have on charities?
  • How would you cope with a fall in donations?

• Views of the Charity Commission  

  “This survey shows that increasing numbers of charities have woken up to the imminent reduction in public spending. While charities have no control over this funding environment, it’s the steps they take now that can even the odds when meeting the challenges ahead. I’m particularly encouraged that over a third of respondents are considering methods of joint working or merger – a potential solution the Commission has been urging boards to consider since the downturn began."

  “However, the finding that only 39% have reviewed their risk register is more worrying. Only by analysing the new risks they face and taking steps to mitigate them now can charities be confident they are anticipating events, rather than being overwhelmed by them."

  “With near-universal pessimism about both the current state of the economy and the likelihood of improvement next year, charities need to work proactively to ensure they remain strongly placed to meet the needs of their beneficiaries in the difficult times ahead. By using the tools which already exist, from Big Board Talk to the wide range of guidance available from both the Commission and others, they can be confident they are taking the right first steps to do so.”

  Andrew Hind,
  Chief Executive of the Charity Commission

Video interview of the survey results