Financial sustainability won’t be easy for the charity sector

July 22, 2015 at 09:48

Today, has seen the launch of the review into the financial sustainability of the voluntary sector, conducted by CFG, NCVO, Institute of Fundraising, Locality, NAVCA and Small Charities Coalition.

It has been a long piece of work, involving a call for evidence from the voluntary sector, with more than 100 charities responding to a detailed survey; pouring over existing statistics, synthesising various strands of research and forecasting the future of the sector’s finances.

The full report, which you can download here, is a wakeup call for the charity sector, government and funders.

Although the economy appears on the road to recovery, the charity sector’s finances are not yet on their way. Moreover, the various pressures from inflation, government spending cuts and demand increases mean that ‘recovery’ may be some time away.

There are numerous lessons to learn from this report, but the overall message is that there are no ‘quick wins’ for charities to become more financially sustainable.

Thanks to good financial leadership and the dedication of charity staff, volunteers and supporters, the sector has managed to ride through the financial storm without the collapse of services. But the sector’s overall finances are fragile, and this must be kept in mind in the context of discussions about the future of fundraising, and the Spending Review coming in November.

This review is an important source of information for the sector to educate funders, at a local and national level. It is also a chance to consider what additional support we need to adapt to the seismic changes that we have seen over the past seven years. Charities should also use it in their discussions with funders and future planning, to test their assumptions and put their own financial situation into context.

Here are four ‘clashes’ which I think come out of the review.

Income generation versus charitable objectives

The most striking statistic that comes out from the review is the fact that 98% of the growth in income from individuals has come from charging and fees since 2007/08.

This only includes fees for services provided in pursuit of charitable objectives, such as membership subscriptions with significant benefits or rent from property where providing accommodation is a charitable purpose, such as care home fees.

On the one hand this is rational behaviour, as in many cases charitable services are high in demand and charging can be considered a ‘low risk’ way of generating income, if individuals are not likely to find those services elsewhere.

But this brings wider concerns. The primary one is the clash between charitable objectives and income generation. In many cases, charging for services will negatively impact on beneficiaries and may mean that some beneficiaries will not be able to receive services. But without charging, some charities will clearly struggle to survive going forward.

On a financial level, will other funders, particularly grant funders, be willing to fund charities if they charge for services? This may clash with grant funders usually instinct to make services free at the point of use.

Charging is not an ‘easy route’ to sustainability and will lead to much soul searching within charities about their values. It may also not be sustainably in many places, particularly deprived areas. The ability of the sector to make up losses of funding so far with charging should not be seen as a long term solution.

Short term demand versus long term sustainability

An important theme that comes out of the review is the clash between meeting short term demand and the need for long term sustainability. As the review says:

“…in many cases, voluntary organisations have been forced to stretch existing resources to cover committed projects or seek out new income streams to fund future work. Without new sources of income (or utilising reserves) to create additional capacity, this is leading to a ‘capacity crunch’. This term describes the point at which a voluntary organisation has used up all their spare capacity and is unable to free up new resources through increased efficiency, even to draw in resources that may be relatively easily on offer. This is a particular risk for organisations which have, up until now, been dependent on government income but are now having to seek out new sources of income.”

This ‘capacity crunch’ is a crucial for funders to understand. New funds such as the Local Sustainability Fund are welcome, but the short time span for applying and limited funds means that it isn’t on the scale necessary to deliver a significant impact.

It is also leaving charities unable to plan ahead for the future. One of the frequent concerns you hear from finance professionals and sector leaders is that they don’t have the ‘headspace’ to think for the future. This is worrying. The demands on the sector are likely to continue increasing in the years ahead, and if government and other funders, want the sector to be able to contribute significantly to achieving social change or delivering public services, this ‘crunch’ will need to be eased.

Income generation versus time

Whether or not the sector is able to generate new income, and given the current debate on fundraising regulation, the sector may find it harder to do this from individuals in the short term.

This is arguably one of the most important graphs for the sector right now.

Potential government income falls versus individual income increases

Potential government income falls versus individual income increases

The graph plots income from individuals (donations, fundraising, trading, fees for services etc.) versus government income. This is based on current projections and the latest Almanac data. The only significantly growing source of income (individuals) is plotted against the fastest falling source of income (government).

As you can see, at the current rate of cuts to the sector’s income and with the current rate of growth in individual income, there is a shortfall of around £1.5bn in the sector’s income, if it is simply to stand still at its present spending power. This is on top of the £3.1bn we need to find, just to be able to counter the impact of inflation.

This is a big concern, and whilst some of this can be offset by funding increases in other areas (such as foundation grants, private sector donations etc.); they are unlikely to be at the scale required by the sector.

Government needs to look again at public service reform, and how it can ensure that charities are given the opportunity to win grants and contracts to deliver services, as well as the scale and pace of spending cuts. Charities, particularly small and medium sized organisations, cannot easily switch from mainly government funded to mainly funded by individuals and foundations overnight – particularly given the ‘capacity crunch’ detailed above.

Small and medium sized charities versus large charities

The review outlines how this has very much been a tale of two recessions for the sector.

Large organisations have been able to adapt themselves and the impact, while it has been significant, has not been fundamental to their operations. However, for small and medium sized charities, the impact of the recession and the subsequent cuts in government spending has been critical.

Charities with income of under £1m have lost on average, 30% of their funding from government since 2007/08. For charities between £1m and £1m it has been tough, with this part of the sector losing around 23% of its funding from government. However, charities which have income over £10m and which already have the largest share of government income, have actually seen their income increase by over 10%.

This masks the overall drop in the sector’s income from government and explains why the ‘big picture’ figures often feel remote to small and medium sized charities on the ground.

This is concerning if we want to have a balanced sector, with organisations of all different sizes being able to thrive and grow.

A sector fit for the future?

If we want the sector to be in a position to effectively deliver change over the next five years, all parts of the sector, government and funders need to take on board this review and the trends outlined.

These challenges are not going to go away overnight and call into question some of the sector’s long standing business models around grants, contracts and service delivery.

It isn’t also doom and gloom, many charities are adapting, collaborating and using new technologies to meet demand and create efficiencies.

But we must not gloss over the financial situation either. As I have written previously, we can’t ignore our financial position.

Government, in particular, as the second biggest source of income for the sector and a strategic funder, has a crucial role to play. The review outlines how initiatives such as social investment for example, while welcome, are simply not a core priority for the sector. We need to focus on need to tackling burdens such as irrecoverable VAT, which cost charities £1.5bn every year, the gap in unclaimed Gift Aid which leaves the sector missing out on hundreds of millions of pounds, the continued problems with VAT shared services exemptions which hold back many charities from effectively collaborating as well as improving public service markets so that charities can effectively compete. We need to work hard to make sure that Ministers engage in this debate and confront the main challenges that the sector is facing, and work to develop policies that can help charities continue delivering impact.