Environmental, social, governance (ESG) Governance, legal and compliance Tax and VAT

NCVO Almanac points to fundamental shifts in the charity operating environment

NCVO has just published summary data from its Almanac 2017 and as always, it is a fascinating read. The launch is tonight, so I’m looking forward to what the NCVO ...

NCVO has just published summary data from its Almanac 2017 and as always, it is a fascinating read. The launch is tonight, so I’m looking forward to what the NCVO team have to say about the key findings. However initial reading does point to fundamental shifts in the operating and funding environment for charities. Some of these we have known for some time but the data appears to be confirming them. All of them have consequences for how charities plan ahead and the risks that we face.

Charities are earning their keep, but this carries new risks

The amount of income that charities earn (e.g. contracts, fees for services, membership, charity shops, raffles and fundraising events) has been increasing steadily over time, and now accounts for 54% of the sector’s income. This is significantly more than charities receive in voluntary income. The importance of earned income was highlighted a few years ago in the Financial Sustainability Review commissioned by NCVO and which CFG supported. The financial implications are clear, but we also need to make sure that this narrative is correctly handled. The positives are clear. Charities are entrepreneurial; they are responding to need and are finding ways to generate income while relying less on hand outs. This could be positive at a time when money is still tight. On the other hand, there is a risk that charities are seen as becoming an ‘industry’ in their own right, praying on those that need help. We must make sure that our values and compassion are not lost in the need to generate income. Finance professionals, as those that understand the numbers, have an important role to play in educating colleagues and busting myths. Earned income does carry its own risk, depending on the sources (i.e. the public) – there is the risk when there is economic difficulty, potential revenue streams may dry up. This could lead to charities losing income at a time when they most need to respond to public demand (except for charity shops, which appear to do better when there is economic difficulty). It is good to note that reserves appear to be growing again, but they may need to grow faster if we are to be in a good position for the next downturn. It is more important than ever that charities are aware of the latest economic information and plan accordingly. Free resources, such as Charity Finance Group’s Economic Outlook Briefing, are useful ways for charities to keep on top of key trends.

More grants coming from within the sector than from government

It has long been noted that grants from government are reducing in importance and now it appears that income in the form of grants from foundations and charitable bodies have overtaken government in terms of their size (£3bn compared with £2.9bn from government). Some of this may be due to grants from intermediaries (which are funded by the government) being counted as part of the sector’s giving. But it is still an important milestone. We need to make the case for government grants. Grants for Good, which is led by DSC and supported by CFG, has been making the case for government do more with grants. Grants also compare favourably with Social Impact Bonds, which are not generating the benefits that were previously claimed for them (£). However, foundations are becoming more important in underpinning activities in the sector, and we should both celebrate this and consider how they can play a role in creating a financially sustainable charity sector.

Our workforce is growing

Charities are employing 3% more staff in 2016 compared to the previous year – faster than the public sector. Some of this may be down to public sector bodies being spun out as charities (perhaps including academies) and their workforce has been added to the sector’s total. This may have offset cuts in other areas as well. But overall, in CFG/PwC/Institute of Fundraising’s Managing in the New Normal 2016 (done around the same time as the Almanac) most respondents were looking to grow their level of staffing. It is important that charities respond to demand and growing their income, but increased staffing does increase the cost base of the sector making it less adaptable – given that 90% of the sector’s workforce is on permanent contracts. Employment costs have also increased with the National Living Wage, Apprenticeships Levy etc. and it is likely that the government will find ways (whether through National Insurance or other levies) to squeeze employers further to pay down the deficit. Charities need to be aware of the impact of this. This may also indicate that charities share the UK’s general problem with productivity. We know that charities struggle with digital and generating sufficient funds to invest in boosting their internal capacity. Although charities often work in ‘people centred’ activities which are harder to generate productivity growth, increased staffing could indicate that there is potential for charities to significant boost their productivity. This is something that all, including government, should do consider seriously.

Uncertainty making charities hesitant to increase overall spending

Charities are spending more on grants and more on generating funds, but overall services has remained relatively flat. This may be that charities are hesitant to commit to new projects or activities because the funding environment is volatile, focusing instead of generating new income and diversification. We have seen a similar issue in the private sector with a ‘cash pile’ being created which companies have been hesitant to spend due to risks in the economy and in government policy. Government can give more confidence by laying out a comprehensive approach to how it wants to work with the sector, including how it is going to support charities delivering public services and generating income. This may also ‘crowd-in’ investment from social investment and the private sector. But given the ups and downs of the past year, this approach from charities is understandable and some of it may be replenishing reserves after dips into them in previous years.

So much to cover…

Fundraising costs going up, investment income recovering, an uptick in government income for smaller charities, central government grants overtaking local government grants…all of these are important issues and CFG will come back to these over time. But for now, we’ll leave it here. What do you think is most important? Do you agree with our analysis? Let us know in the comments below… « Back to all blog posts