The Cost of Living Crisis affects Charities

The cost of living crisis hits charities in a number of ways. Public donations will generally fall when household disposable incomes are being squeezed, and there have been well-publicised falls in total investment returns, especially in the latter half of 2022. At the same time, pressures on individual finances create additional demand for those charities engaged in areas such as poverty relief or mental health support. The ongoing conflict in Ukraine and the recent earthquake in Turkey and Syria both had a significant impact on those charities involved in disaster relief. In terms of overheads, increases in energy prices combine with wage inflation to drive up the core costs which are often not covered by major funders.

In the light of a perfect storm of income reduction and pressures on both direct demand and indirect costs the Charity Commission has issued new guidance for charity trustees and executives on managing the impact of the cost of living crisis.

Trustees’ responsibilities

When times get hard it is important that trustees continue to understand and comply with their duties to provide effective financial stewardship, and to ensure that any decisions are in the best interests of the charity.

Trustees must always:

Act within their powers under the charity’s governing document and the law
Act in the best interests of the charity to carry out the charity’s purposes, even if the approach to fulfilling those purposes may need to change
Act with prudence to manage the charity’s resources responsibly
Act with reasonable care and skill and take appropriate advice when necessary – especially important if the charity or its property may be at risk due to financial challenges
Manage any conflicts of interest arising

Acting in the charity’s best interests

The starting point for trustee decisions must always be what is in the charity’s best interests. In the context of financial resilience, the Charity Commission’s existing guidance helps trustees consider what they should focus on.

There are likely to be a number of factors to account for, including the balance between:

Reducing costs in the short term in order to be able to preserve funds to support beneficiaries in the future
Meeting the immediate needs of the charity’s present beneficiaries with the possibility that in the future the charity may have to reduce or even close its services

As with most major strategic decisions, it is helpful to have open communication with beneficiaries, supporters, staff and volunteers. However, those consulted should be clear that the final decision will be made by, and the responsibility of, the trustees.

Considering the risks of decisions

Trustees must assess the risks that may arise from the decisions they make. In periods of financial difficulty those risks may include:

Whether the charity will continue to be able to safeguard beneficiaries and protect them from harm as the charity enters a period of potentially significant change
Whether it is prudent to sell investments or other assets in order to release funds for current expenditure. Asset sales may raise less money in a downturn than might be secured in better economic circumstances, but it may still be in the charity’s best interests if it is the best option available for meeting urgent needs. Trustees should always clearly record the reasons that key decisions are made

Evaluating the charity’s financial position

It is important for trustees to have an accurate picture of the charity’s current and planned short-term operations, and the cash flow implications. This picture, as a minimum should include:

The payments the charity will have to make over a range of timescales (for example, the next few weeks/month/three months/six months). Clearly, this will be a more difficult forecast for some charities than for others
What cash is currently available to cover those payments as they fall due
A best estimate of the income that the charity realistically expects to receive over the same timescales

This basic forecast should help trustees identify whether the charity is at risk of running out of the cash it needs and when any pinch point(s) will happen. Trustees should then use the forecast to manage the charity’s short-term operations and enable recovery in the longer term. It may also be prudent to set aside a contingency fund to cover unexpected additional costs which may arise.

Frequent reviews and revisions of the forecast will help you trustees manage the charity’s finances and to evaluate the charity’s ongoing ability to carry out its charitable activities. The cashflow forecast can also help determine when the charity may:

Be able to return to a more normal operating level
Need to make temporary or permanent changes to services in order to protect the charity’s longer-term position
Need to consider closing or merging the charity. Trustees should consider whether there are trigger points that may indicate that closure is necessary, for example the loss of a major funding stream. To support this decision, it is helpful to understand the likely costs of closure

Developing options to support continuing operation and delivery

Having sufficient cash flow to continue to operate is essential. Trustees should consider whether there are ways to minimise costs and maximise income to improve the charity’s financial position.

Minimising costs

If the charity can continue to operate, trustees should consider whether it is possible to:

Stop or put on hold non-essential outgoings, taking account of any cancellation costs;
Explore ways of operating if these might be cheaper through, for example, use of technology
Re-allocate staff to the highest priority tasks relevant to supporting the charity to survive the financial challenges. This may involve the closure or suspension of some less-critical service lines
Talk to any lenders to see if there is any help available for your charity’s borrowings. For example, re-scheduling loan repayments over a longer timescale

It may be possible temporarily to pause some of the charity’s services for a fixed period if costs currently outweigh benefits. If these involve binding contracts, trustees should check if there are penalty charges and whether there is any option of waiving these.

Reviewing the charity’s funds to see whether any can be released

If the charity has free reserves these may be used to address financial difficulties. Where charities hold reserves as financial investments, trustees will have to balance whether drawing down on investments is in the charity’s best interests given the potential loss of the income stream they provide, and the potential loss in value of capital from selling when asset prices are low.

Where charities maintain restricted funds it may be possible to change what these funds can be spent on. However, this would require advance permission from the Charity Commission before the purposes of a fund can be changed and should not be relied upon as a short-term strategy due to the likely timescales involved in getting Commission consent.

In the worst-case scenario…

After full consideration of the circumstances and the options, trustees may decide that closure of their charity is the best course of action. In those circumstances, trustees should focus on the key areas to protect the charity’s best interests:

Check the charity’s governing document for any requirements and restrictions on closure. It may specify the process for closure and how any assets left after costs are to be used. Permanent endowments may need to be transferred to another charity
Decide whether the best option is the complete closure and dissolution of the charity, or whether a merger into an ongoing charity with aligned objects is more appropriate
Understand the costs of closure. These may include committed contract and leasing costs, redundancy payments, costs of transferring assets, or services or parts of a service to other providers
Consider how the charity will communicate its plans to users and beneficiaries. Where possible the charity may be able to signpost support that will help them adapt to the loss of the charity’s services and protect them from harm. It is also important to communicate the decision to funders, volunteers, staff, supporters, creditors and other stakeholders
Take professional advice if the trustees decide to close the charity. This is particularly important if the charity is incorporated as a company or CIO because there are legal requirements to meet. The Commission’s guidance document CC12: Managing a charity’s finances: planning, managing difficulties and insolvency provides broad advice about the processes to follow

If the trustees do decide to close the charity, they should consider appointing administrators who will take over and ensure that all the appropriate legal mechanisms are followed.

Summary

Less than three years after the seismic shock of the Covid pandemic, UK charities are once again faced with a highly challenging climate. The sector survived the pandemic better than many initially feared and many organisations successfully navigated the landscape by a combination of innovation and proactive management – a learning curve which will stand many in good stead as the UK enters a recessionary climate. The charities which prove the most sustainable, both in terms of their finances and their offering to their beneficiaries, will be those with a strong grip on cashflow and those which are most responsive to change.

Kreston Charities Webinar 2023: Understanding the current issues facing UK Charities

Catch up on our latest Kreston Charities webinar, during which we prodvide insight derived from our newly released Kreston Charity Report, including financial matters, technology and cyber security concerns, as well as workplace considerations including diversity, recruitment, and pay.

Our agenda was shaped by the key concerns of the charities that contributed to the report, and covered:

Technology and cyber security
Environmental, social and governance
Finance, reserves and costs
Diversity, recruitment and pay

Watch the webinar here

Kreston Charities Report 2023

The Kreston UK Charity Group works with more than 2,000 charities of various sizes offering a range of services across the UK and this survey sheds important insight into the experiences of a wide range of charities across the UK.

In particular, the results demonstrate the impact that the cost of living crisis is having on the charity sector: A large majority of the charities surveyed have seen costs rise over the past 12 months due to soaring energy bills and inflation. Recruitment is also a real concern, with 64% of charities saying that it has become more challenging to both recruit and retain staff.

Download here

Contact Us

James Cowper Kreston is a leading firm of accountants and business advisers, with offices across the South of England. We deliver focused, innovative advice to a diverse range of businesses and individuals helping our clients to maximise their potential.

If you would like to discuss any of the topics raised within this newsletter please email us on info@jamescowperkreston.co.uk or call us on 01635 35255.

Kind regards

Mike Bath | Partner

T: +44 (0) 7557 340691 | E: mbath@jamescowper.co.uk

The information in this newsletter must not be relied on as giving sufficient advice in any specific case.