Tough times for charities: Accounting & Business

These are tough times for charities.  When recession hits, the public becomes less generous.  Worse still, organisations funded by public money expect to have grants and contracts cut substantially. 

Analysis of charitable giving conducted by the Charities Aid Foundation together with the National Council for Voluntary Organisations (NCVO)  found that donations to charities fell 11% in 2008/9, at the onset of the recession, compared to the year before.   There was a drop in larger donations and a fall in average donations by higher earners. 

Meanwhile, costs have risen.  Demands on many charities have increased substantially because of the recession.  National Insurance increases are effectively making staff 10% dearer to employ.  And the Charity Tax Group fears that VAT could rise to 20% – potentially costing UK charities an extra £130m a year.

For charities dependent on public sector funding, the worst is yet to come.  “There are concerns about what is likely to happen next year,” says Ann Blackmore, head of policy at NCVO.  “Money to the voluntary sector is a discretionary spend, so local authorities are more likely to make their cuts there.”  A lot of NCVO members are suffering from a reduction in individual and corporate giving.  “It is almost impossible to sign-up new donors,” she reports. 

Kevin Curley, chief executive of the National Association for Voluntary and Community Action (NAVCA) – which describes itself as representing the ‘local third sector infrastructure’ – says that his members are also suffering.  “Voluntary contributions are down by around 12%,” he reports.  So far, though, predicted reductions in public sector funding have not happened. 

“We have only had a few examples of local authorities making cuts for the financial year to come,” explains Curley.  “Most local charities are benefiting from agreements running through until 2011/12.  There are a range of funding streams that come to an end in 2011.  We have no idea what will come then.  We are in limbo.”

But the expectation of future cuts is itself having an effect. “There is a greater degree of risk aversion in local charities providing services,” says Curley.  “It makes people extremely conservative about new services, taking on new staff and recruiting new volunteers.  It makes people try to pull their horns in.”  Nervousness is centred in particular on what might happen in the first Budget after the General Election. “That is when we could see a lot of service reductions,” says Curley. 

David Membrey, acting chief executive of the Charity Finance Directors’ Group, suggests that medium-sized charities are faring particularly badly.  “Big charities can make cuts where they need to,” he explains.  “Really small local charities are getting by because they don’t have huge costs or staff, and they have loyal local supporters.  The middle sector – charities with half a million to £10m turnover – are suffering more than those that are bigger or smaller.”

But Membrey is another who worries about small, service-oriented, groups relying on public funding.  “There are some charities that are set-up specifically to do public sector-funded projects,” he says.  “A lot of those are going to go to the wall.”

Perhaps surprisingly, public generosity in response to the Haiti appeals has probably not affected other charitable donations.  Analysis of the impact of charitable-giving following the tsunami found that donations were extra money, rather than displacement from other gifts to charities.  More of a problem is the inability of grant-making trusts to continue to provide their normal level of support to charities: their income has declined substantially because of the environment of low interest rates and poor investment performance.

Membrey says that charities are responding sensibly and imaginatively to these problems. Many, for instance, are writing to regular donors, explaining that they can understand if supporters cannot afford to give as much in the current financial circumstances, but also explaining what they are doing during the recession.  Often the result is an increase in donations. 

But, in addition, charities of all sizes are being forced to respond to the current crisis by conducting fundamental reviews of their operations, seeking to cut costs and improve efficiencies.  “A lot of finance directors are looking very carefully at internal costs, such as insurance, audit costs, payroll, banking, telephone and power,” Membrey says.  They are also looking at property costs: they might have properties they don’t need and it might be cheaper and more efficient if they rent. 

Accountancy firms are now engaged in advising many charities on how to cut costs.  Andrew Robinson, a tax director at Grant Thornton, argues that with reduced income, higher costs and greater demand for services, charities must consider radical action to balance their books. 

Grant Thornton is advising charities how to restructure remuneration packages on a more tax efficient basis – such as salary sacrifices that reduce national insurance contributions for employer and employee, which are replaced by a non-monetary reward of greater value to the employee.  “Very few charities do operate on a employee tax efficient basis,” argues Robinson. 

More, no doubt, will do so now – along with reviewing much of the rest of their operations.

Boxes

The impact on major charities

Some large charities report that income rose last year – but not as fast as expected, causing them difficulties. 

Christian Aid reports that it had expected to increase donors and donations in 2008/9.  In practice, it suffered a higher than predicted drop-out rate of regular donors, so that regular gifts did not rise.  There was a rise in income tied to specific projects (even taking into account the loss of most of the tsunami-related income) and a slight fall in income that was unrestricted.  It recorded a big increase in grants from governments and other institutions and a 12% fall in donations.

Martin Birch, finance director of Christian Aid, explains that the charity is tackling a double whammy of higher costs and lower than expected donations.  In addition, the weak sterling valuation means that the agency cannot carry out as much aid as it would wish.  A further pressure is the reduced value of assets in its pension fund, which continues to be a financial strain on the charity despite being closed to new entrants in 2007.  “Yes, the recession has impacted, but in a managed way,” he says.  “We have professionals scanning events.”

It is a similar situation at Cancer Research UK.  A spokeswoman says: “Although our income increased overall last financial year, in the early part of the year it was significantly behind our budget. As a result, we took a cautious approach to committing expenditure, thus maintaining a balanced budget. In the final part of the year income recovered as our donors continued to show their support for the charity.  In the event – and thanks to the efforts of our fundraisers and volunteers, and the very generous support of our donors – our funds raised were slightly up on the previous year at £433 million, exceeding £400 million for the third consecutive year. This was an exceptional result given the testing environment.”

The impact charities delivering public services

Cuts in public sector spending could severely affect the capability and capacity of charities, including larger charities.  The Charity Commission’s Economic Survey of Charities reveals that a quarter of charities with incomes above £100,000 regard public sector funding as their most important source of income.  The survey found that larger charities have been worst hit by the recession, with 79% reporting a fall in income, compared to 62% of all charities.  One in three larger charities have experienced an increased demand for services.  Charities’ investment income has been badly hit, with 62% of charities holding investments suffering a fall in income in the past six months.  Some 79% of larger charities have put in place measures to deal with the decline in funding, compared to 31% of small charities.  While 84% of charities are optimistic about the outlook, some 47% expect the financial recovery for the charitable sector to lag behind that of the wider economy.  The worst hit charities are those dealing with international development (74% report an adverse impact from the recession), health (74%) and social services (65%).  Nearly half of the charities surveyed fund raise from the public and this is the main source of income for nearly a quarter of charities.

Dame Suzi Leather, chair of the Charity Commission, said: “Clearly severe cuts lie ahead in both local and central government resources; many local authorities are already identifying spending on the voluntary sector as being vulnerable. There is a real concern that charities which receive money from the public purse to fund their valuable work could find themselves at a financial cliff edge in March 2011. This suggests that the high levels of optimism displayed by the charities we spoke to may be misplaced.  Of course, many charities play a hugely important role in delivering public services and rely heavily on public sector funding.  These charities should ask themselves: can we take steps to increase our chance of winning local contracts? Could we collaborate with another charity to reduce costs? Or are there ways to diversify our income?”