April 12, 2022
Survival Guide for Charities in Economic Turmoil Charities play a vital role in our society, often stepping in to help when government services can't or won't. However, with the looming shadow of economic instability and the skyrocketing cost of living, many within the charity sector are feeling the pinch. An impending recession could have a significant impact on their ability to deliver essential services. This guide provides some survival tips for charities navigating through these choppy economic waters.
Every charity should have a reserves policy. This policy outlines the amount of free reserves a charity should ideally hold. Free reserves are funds that can be spent freely on the charity's activities or overhead costs. They exclude fixed assets for the charity's own use, funds restricted by donors, and money set aside for future expenditure. The importance of maintaining an appropriate level of free reserves cannot be overstated. These reserves provide a safety net for charities to manage unexpected emergencies or sudden needs that were not anticipated during budgeting. They can also help in covering short-term budget deficits, initiating new projects before other funds become available, and managing restructuring efforts if grants are cut.
Walking the fine line between maintaining enough reserves and ensuring that sufficient funds are spent promptly on charitable activities is an ongoing challenge for charities. Keeping too much in reserve may lead to limited spending on essential activities, but too little may jeopardise the charity's survival in the face of financial difficulties. Setting a free reserves policy based on the risks faced by the charity can aid in striking this balance. Charities should be prepared to review their risk registers in the current changing economic landscape and decide whether it might be necessary to hold more in reserve for the years ahead.
Diversification of income is another crucial strategy for charities, especially during a recession. With the possible decrease in public donations during hard economic times, charities can benefit from exploring other income avenues, such as charity shops, online fundraising campaigns, and corporate partnerships. This diversification can help them adapt to changing circumstances and manage financial risk more effectively.
No one likes to think about worst-case scenarios, but having a plan in place can provide much-needed reassurance for both management and trustees. Forecasting a 'worst-case scenario' helps charities prepare for potential financial setbacks. Remember that restructuring, as unpleasant as it may be, is sometimes necessary. If you've already accounted for it in your worst-case scenario, it will be less of a shock if it does become a reality.
James Gare, Charity Partner at Monahans says “I often suggest to my clients that forecasting a ‘worst case scenario’ is a powerful financial tool. Understanding that in a worst case scenario, you could effectively restructure, as unpleasant as that might be, provides assurances to Management and Trustees that the organisation knows what needs to happen if things start going wrong.”.
In conclusion, while the charity sector may be facing tough times due to the uncertain economic environment, there are strategies that charities can implement to weather the storm. By establishing a sound reserves policy, future-proofing operations, diversifying income, and preparing for worst-case scenarios, charities can increase their resilience in the face of economic turmoil. It's about making sure that charities can continue to do the invaluable work they do, no matter what the economic forecast looks like.
