Where are the ‘automatic stabilisers’ for charities income?

September 26, 2017 at 17:07

This blog post is prompted by the Association of Charitable Foundation’s (ACF) latest Giving Trends research, which is a must-read for everyone in the charity sector.

The news is very positive overall. Rising asset values has supported a very strong growth in investment income. Grants to charities have increased by over 12% according to the report.

At a time when government grants are like gold dust (or maybe platinum dust, given their rarity?)  the fact that foundations are stepping up and doing more must be welcomed. I also want to highlight the 70 foundations in this report, who saw their income fall but spent more on grants. Often there is a view that foundations are ultra-conservative, and ignore the wider needs of the sector and beneficiaries in terms of spending. However as this report shows, many foundations are recognising the urgent needs out there and responding as best they can.

ACF has often spoken about the ‘ecology of funding’. Not every pound is worth the same. A pound of unrestricted grant funding is worth a lot more in the current context than a pound of payment by results funding, because of the flexibility it gives charities to adapt and respond. This makes foundations even more important. You can check out the Grants for Good campaign’s website to find out more about why grants are vital and why government should deploy grants more.

But as this report highlights, the stepping up of foundations has been built on wider economic growth, particularly in the stock market. But what do we do if there is a down turn, what happens then?

Cyclical versus counter-cyclical funding

We can broadly put charity sector funding into two forms: cyclical and counter-cyclical funding.

Cyclical funding is funding that grows when the economy performs well. Investment income is clearly one of those. Corporate donations is another. So is trading between charities, which took a hit in the post-recession years according to the NCVO-led Financial Sustainability Review.

I’d also stick general fundraising income into this mix although the situation is slightly more complicated here. Although fundraising income doesn’t fall during downturns, it doesn’t appear to grow either, so it isn’t much good at replenishing the pot for most charities in the event of other sources of funding drying up. But thanks to the generosity of the British public, it isn’t something extra to worry about – although increased fundraising competition may change this in future years.

Counter-cyclical funding is funding that grows when the economy isn’t growing strongly. It may sound odd but some funding sources improve when the economy doesn’t do so well. Evidence seems to suggest that charity shops, for example, is one of those revenue sources. As household finances are squeezed, people look to make their money stretch further and charity shops are one way to do that.

These counter-cyclical funding sources are critical to the sector in two ways.

Firstly, it helps to balance financial risk. It looks like we are heading towards even more volatility given Brexit. Charities should always be thinking about the balance of funding streams between good times and bad times. This isn’t just about reserves although reserves are an important part of the equation. Changes to your business model can be just as vital as putting money aside for a rainy day. Ideally, we want to be cultivating income streams that can stand up to economic storms.

Secondly, it is often the case that beneficiaries are most in need when the economy takes a turn for the worst.  This means that rather than operating ‘business as usual’, organisations will see a spike in demand. Our Managing in the Downturn surveys with PwC and Institute of Fundraising, following the recession, documented that rising demand over the years following the Great Recession.

Government income: the unknown

As was highlighted during the discussion of the ACF report today, foundations are increasingly being asked to backfill the work that government traditionally funded.

Government income is the biggest unknown when it comes to funding streams because it is down to political choices. During 2008-10, the then Labour government took a very Keynesian approach and pushed money out the door quite rapidly. Charities benefited from a number of the temporary schemes that the government created.

In 2010, the then Coalition Government decided to cut spending and reduce the deficit, particularly to local government and this saw a squeeze on many charity incomes – especially smaller organisations.

Although governments in times of economic distress are often under pressure to cut their spending, often markets flock to government debt because it is considered safer than corporate debt.

In macroeconomics, the talk often focuses on ‘automatic stabilisers’ such as social security spending, which when the economy heads downwards kick in to ensure that we don’t spiral into a depression.

ACF’s report has prompted me to think: how do we build up ‘automatic stabilisers’ for our sector? Given the government’s stepping back from supporting the sector, particularly with grants, is the role of government as a stabiliser dead and buried? Or is now the time for a discussion between the government and the sector on what we do in the event of the next downturn? This is particular important for beneficiaries, who are likely to turn to our sector as they did following the last recession.

It is now generally agreed that we are closer to the next recession than we are away from the last one. The ACF report is an important reminder of the positive impact that foundations have – but they can’t do everything.

Although it is tempting to decry this as looking for clouds in the midst of blue sky, I would argue it isn’t a bad idea to start thinking now about where we can find our financial umbrella ahead of the next downpour.

PS. I have put together an Economic volatility matrix which helps to map out different income streams and your charity in terms of different funding streams. Obviously every charity is different. Some investment strategies may be geared towards assets that perform well in economic downturns. Others may have fundraising streams which perform better because of a strong emotional connection to the cause. This is just to help board discussion and illustrate the issue.
Economic volatility matrix