Building financial resilience in your charity

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Impact of COVID-19

The COVID-19 pandemic has certainly pushed the charity sector to the brink, leading to sharp reductions in incomes for many. Despite this the demand for services of charities has risen, as the people of the UK also feel the harsh impacts of this crisis. This has led to real doubts for many charities of how they will survive.

Latest estimates published in 19 June 2020 on the financial impact on charities of the coronavirus, give a shortfall of £12.4bn (a 24% fall in income from 2019). This is the result of surveys performed by The Chartered Institute of Fundraising and the Charity Finance Group, which indicated that charities had received 29% less income than had been budgeted.

Are all charities struggling though?

In fact, no. Whilst all charities have been impacted by the pandemic, that is without question, a number of charities have faced significantly fewer financial pressures. This has enabled them to focus all their efforts on helping those in need.

Why this disparity? Well, sometimes it could be said to be luck – having very generous or flexible supporters. However, more often it is as a result of those charities being more financially resilient.

This article looks to explain what financial resilience is, why it matters and what your charity can do to obtain it.

What is financial resilience, and why does it matter?

Financial resilience is defined as the ability to withstand life events that impact upon an organisation’s income or assets.

There is little doubt that the Coronavirus will have tested the financial resilience of all charities, as both incomes and values of assets have been under pressure.

Fundraising events, including the London Marathon, were cancelled to prevent the spread of the virus. Similarly, the effects of lockdown measures around the world have forced many companies to cut dividends and share prices have fallen. This has also meant that charities reliant upon investment income will likely receive significantly less this year, whilst losses could be realised if the assets are sold.

Financial resilience is very important to ensuring the long term survival of a charity. By having the ability to withstand difficult short term financial challenges, such as COVID-19, it leaves the charity able to continue providing support to those people in need, safe in the knowledge that they will be able to continue their good work in the future.

Maintaining sufficient reserves

It has been quite evident that one of the most important factors in charities who have shown financial resilience through this crisis, is the level of reserves they were holding at the start of the pandemic.

Having a pool of reserves to rely upon allows the charity to operate for a period of time without any income. This gives a charity’s trustees and management time to put alternative plans into action.

During the crisis, some charities have utilised this time very well, to build new and effective online methods of fundraising. This has helped to reduce the potential deficits charities faced back in March.

This is not to say that charities without large reserves have not been able to successfully do the same. Contrary, it is entirely possible, but it can be a much harder challenge, as everything needs to be achieved so much quicker. Naturally, this reduces the chances of being successful.

How do you end up with a large pool of reserves?

Well certainly not by chance. This is only possible by planning and foresight, which are the hallmarks of good charity governance. Notably, it is the reserve policies adopted by trustees that will set the plan for a charity to accumulate the reserves needed for financial resilience.

Once set, it is crucial that management are aware of the target and decisions made to ensure surpluses are made to allow the reserves to accumulate.

What level of reserves would be ‘sufficient’?

Typically, it is advisable to hold reserves which could cover the operating costs of the charity for up to 3 months, although an individual charity’s circumstances may mean this level differs.

Key to defining this period and calculating the reserves to held, will include answering questions including: what are the current expense levels and how might they change in the future? How long might it take to find alternative sources of income? What time would be needed to scale back the operations of the charity, including provisions for any potential redundancies? How long might it take to wind the charity up?

Factors including the terms of leases held on any properties, staff contracts and grants will also be important to consider.

Be careful that the charity only seeks to hold ‘sufficient’ reserves though. Too many reserves held will mean that the charity is likely not doing as much to help its beneficiaries as it could. It is for this reason that if too many reserves are held then, the Charity Commission may question why.

Is it only the level of reserves that is important?

Definitely not. Undoubtedly, having good levels of reserves will help the charity become resilient, however there are other important factors to consider are how core expenses are funded, and the diversity of income.

Core funding

A common issue faced by charities is that it can be difficult to raise funding for ‘core costs’, which are those support or governance that do not directly contribute to the work of the charity.

Functions covered under these core costs include finance, HR, health and safety, IT, office upkeep, safeguarding and employment of senior management to oversee the charity etc.

In the latest Charity Commission publication, entitled Regulating in the public interest, the surveys undertaken found that the public expect “that a high proportion of charities’ money is used for charitable activity”. Whilst understandable, this expectation can make it difficult for charities to fund core expenses.

These administrative expenses become more important the larger the charity grows. When the charity is small, it is possible to find people willing to volunteer to support the charity (e.g. a treasurer to manage the finances). However, as the transactions and complexity of the charity’s operations increase, the charity will likely need to employ either staff or an external company to cope with the level of work.

Without these crucial functions, a charity will struggle to be effective. Therefore, thinking about how these costs are funded is important.

Funding options including seeking core funding grants, such as those offered through the Kent Community Foundation, or seek another source of unrestricted income. Other forms of unrestricted income can be derived from donations, investments in stocks and shares (the risk profile of these investments needs to be carefully considered though), or offering a trade, perhaps linked to the charities work.

The security of unrestricted income also needs to be considered when reviewing the income mix. For example, investment income from a portfolio of shares is likely to be more dependable income than that derived from donations.

However it is derived, unrestricted income is crucial to funding the charity’s core costs, and is key to the continued success of the charity.

Lack of diversity of funders

Charities which place significant reliance on a small number of funders run the risk of struggling financially if one of those funders chooses to stop contributing to the charity.

In particular, a study by the University of West England in their 2016 publication entitled Financial Resilience in Charities identified a particular weakness for those charities reliant upon grant income.

They analysed financial data from 2010 onwards for 40 charities, half of which had ceased operation since the beginning of 2015. Of the charities reviewed, grant income formed a larger proportion of the total income of charities which had failed by 2015, than those who were still operating.

Grant income as a share of total income - Green, Lizzie & Ritchie, Felix & Parry, Glenn & Bradley, Peter. (2016). Financial Resilience in Charities.
Green, Lizzie & Ritchie, Felix & Parry, Glenn & Bradley, Peter. (2016). Financial Resilience in Charities.

A similar issue was not found for donations or activity income (defined as income raised from activities such as retail, service provision and ad hoc events). Instead, for surviving charities, donations were found to form a greater share of their total income than for the failing charities.

Donated income as a share of total income - Green, Lizzie & Ritchie, Felix & Parry, Glenn & Bradley, Peter. (2016). Financial Resilience in Charities.
Green, Lizzie & Ritchie, Felix & Parry, Glenn & Bradley, Peter. (2016). Financial Resilience in Charities.

A reason for this is likely to be due to a lack of diversity of funders. For many charities, donations will be formed of lots of small contributions from hundreds of different individuals and organisations. This will be similar for activity generated income. However, grant income will often come from a small number of funders.

The large diversified pool of funders reduces the risk to the charity of a funder ceasing to support the charity (either through choice or necessity).

However, it is easy to see how this scenario arises. The support of grant income can be significant and can transform the number of people a charity can support.

It would therefore be unreasonable to expect grant income to not be accepted. Instead, some caution and plans need to be made for the future, in case that income ever stops. By diversifying the charity’s income, the charity will become more financially secure.

Related: Financial information – why is it key to gaining public trust in your charity’s finances

Is your charity financially resilient?

The latest events have brought into sharp focus the importance of charities being financially resilient. Looking back on the past months, what lessons can be learnt?

Importantly, how could your charity become more financially resilient? What changes could you make to ensure you are able to continue supporting beneficiaries long into the future?

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