Governance and Risk Consultant, Sam Coutinho, looks at the issue of risk and what small charities can do to manage their risk in 2022 and beyond.
The past 20 months have really shone a light on the strength and weaknesses in governance and risk for all charities. Trustees have had to become agile in the way they operate and in their decision-making.
Identifying, assessing and managing risk has moved beyond compliance and a risk register. Risk management has been fundamental to the survival and now the sustainability of many charities. With limited resources, many smaller charities find prioritising governance and risk management challenging. But there are a number of areas where smaller charities might focus their efforts during this current year.
Impact of the pandemic
Much has been written on the pandemic’s impact on the charity sector particularly regarding finances. Most charities experienced a significant decline in income across most income sources, mainly due to the cancellation of fundraising events, closing of charity shops and decline in regular giving.
In addition, many grant-makers were concerned that returns on investment portfolios would decline and in return reduced grant payments. Charities accessed the limited government support that was available which helped, but levels of income have not been restored and this has a direct impact on the financial operating model.
With the pressures on income, it is important that the cost base is also reviewed to ensure the charity can operate in the most efficient and effective way. In the short-term, deficits can be funded from reserves. However, an operating model that is generating deficits is not financially sustainable.
The pandemic has had a significant impact on people resources. Many charities have had to restructure and reduce the number of staff to a more affordable level which in some cases has meant there now may not be sufficient resources.
Many charities rely on volunteers and the last two years has had a significant impact on volunteers. While they are returning, a large number have not for personal reasons given this has been an unsettling time.
For many charities volunteers are fundamental to the delivery of services, keeping charity shops open and helping with keeping the charity running to name just a few areas. Not returning could have a significant impact on the sustainability of the charity.
A third area to consider is demand for services. While many charities have seen an increase, charities that deliver face-to-face support have not been able to do this during the various lockdowns and particularly where beneficiaries are vulnerable.
In my experience as the chair of a cancer support charity this has certainly been the case. We have had to consider alternative ways to support our clients and, in some cases, have had to stop delivering certain services. With clients feeling vulnerable we have had to revisit and change what we do and how we do it to meet the needs of those that need our support.
Finally, the distinction between governance and management has been blurred with trustees having to get more involved in operational decisions. It is important now that the balance is restored to ensure trustees can challenge in a constructive way and properly exercise oversight.
The pandemic has highlighted many strengths in governance in charities including the ability to act quickly and make decisions. However, it has also highlighted areas to be developed including the effectiveness of boards, group think and the absence of diversity, weaknesses in risk management and the lack of training of boards on sector issues.
Managing risk effectively
For many charities risk management has been a compliance activity. The last 20 months has forced charities to consider risk management in a very practical way. Charities should now consider how effective their risk management is by looking at the risks in their risk register and considering the following questions:
Have we identified the risk, what would cause and the impact it would have on the charity? Risks are often not understood well enough to enable them to be managed properly.
- Are the controls identified controlling the risk? Often controls identified fail to prevent the risk or reduce its impact.
- How are risks classified? Are we classifying risks so that they make sense to the charity aligning to activities and objectives or are they aligned to standard practice?
- Have the risks that could break the charity been identified?
What should charities be doing in 2022?
- Charities should review their financial model to understand the sensitivity and uncertainty around each income stream, the cost of running the charity and the impact on the future delivery the objects.
- Charities should review their staffing structures including their volunteers to understand the minimum level of resources required, to ensure the charity is sustainable. A review should also be carried out of the systems and processes to ensure resources are being used effectively.
- Charities should review their strategy and be considering a recovery strategy for the next couple of years.
For smaller charities the above suggestions may seem extensive given limited resources. However, only by focusing efforts in fully understanding the financial model, the utilisation of resources, the recovery strategy and effectiveness of the risk and governance arrangements, will you be able to future proof your charity.
About the author
Sam Coutinho qualified as an accountant in the corporate sector in 1996 and developed her career in the charity and education sectors. For 22 years, Sam provided internal and external audit, and advisory services to charities and schools and since 2019 she has been providing risk and governance advice. Her interest in governance and risk has developed over many years, starting in 2002 at Crowe UK and continuing at Haysmacintyre.
Sam is a governor or trustee of a number of organisations, including chair of the Nightingale Cancer Support Centre, a membership of the Ivy Learning Multi Academy Trust, a governor of Plymouth College, a governor of St Ignatius College and trustee of the Association of Governing Bodies in Independent Schools. Sam is also a partner in two significant charity and education firms. She is a Certificate Member of the Institute of Risk Management.