The cost of living crisis continues to challenge organisations of every size. Stephen T Dean from Grant Thornton UK takes a look at the pressures charities are facing in 2024 and what they are doing to manage them.
We are all familiar with the economic challenges society has faced over the last few years. Inflation spiked at 11.1% in October 2022 and there followed a rapid increase in interest rates.
As a consequence, mortgage rates increased by approximately 4%. All this occurred when wages were not generally keeping up with the increase in the cost of living.
While inflation and interest rates have reduced to 2.2% and 5% respectively, energy costs remain high. A reduction in inflation simply means that cost rises slow down, rather than them returning to their previous levels. Therefore, the cost of living challenge remains.
What is the impact on the sector?
As one might expect, funding and demand have been affected. We have generally found that income from most sources has come under pressure.
Voluntary giving is less affordable for individuals, while grants and statutory funding are harder to obtain, either because there is less money available or there is more competition for what funding could be provided.
Demand from some areas of the charity sector has increased despite funding pressures. In 2022, at the height of cost rises, the Independent Food Aid Network (IFAN), representing 550 independent food banks, found 93% of IFAN food banks surveyed reported an increase or significant increase in the need for their services since the start of 2022.
This included up to 25% more users of these services at some food banks, meaning more people drifted into the position of needing support from food banks.[1] IFAN also reported a drop in food donations with nearly 20% of food banks having to reduce the size of food parcels.
We have generally found that demand has risen for community and social causes. However, there are corners of the charity sector where demand is unaffected by the cost of living crisis. These are generally where a core or statutory service is provided.
For example, the Academy sector has received more funding from the government to support the increase in utility costs and increases in staff pay. Where demand has increased in the education space is around food for pupils both in and out of term time, because of how children might be affected by the cost of living crisis outside school.
How is the resulting financial challenge being mitigated?
Very simply, charities need to find ways to increase revenue while at the same time controlling or reducing cost.
Publicly funded charities are managing their revenue needs through tough negotiation with local authorities or government departments to secure inflationary increases. Costs are being mitigated partly through efforts to reduce consumption.
Quite often the biggest cost for charities is payroll. There has been pressure from employees to increase wages in line with inflation.
Some areas of the private sector have come close to matching inflationary increases, leading to attractive opportunities for employees to leave the charity sector. This adds more pressure on charities to try and remain competitive which can be counterintuitive to other cost savings being made.
We have seen this scenario play out in the healthcare sector, where salaries have needed to be increased in order to keep essential staff and skills within those organisations.
Charities also need to be creative in how they fund their service provision.
One charity Grant Thornton UK works with has considered their income streams by looking carefully at which strands of revenue can be increased by more than inflation to subsidise other activities. They have also looked at the range of activities undertaken to seriously review whether they can continue to pursue them all.
Reflections for the future
So given all this, we have considered with the sector what charities need to do in order to remain resilient and continue to support those in need. The key reflections include:
~ Being agile – having the ability to change plans as circumstances dictate.
~ Spreading risk – for example continuing to have a diverse range of income.
~ Focusing on doing the basics well – it is important to focus on efficiency and effectiveness and keeping these activities simple and right first time, every time.
~ Strong financial management and effective use of resources, knowing where to invest and where to reduce.
~ A strong and creative leadership team, and governing body who can make decisions quickly and who have a clear vision for the organisation and are committed to ensuring the vision, values, ethos and method are upheld at all times.
[1] Food bank demand and the rising cost-of-living (parliament.uk)