Charity advice: managing funds during a downturn
When recessions come, charities can suffer. With less donation income and more demand on their services, they can experience serious financial difficulty. In order to make it through to the other side, charity executives need to be responsive to ever-changing circumstances and devise a clear yet flexible plan of action.
We’re outlining some of the considerations to take when deciding how to manage charity funds, including how to re-assess the overall strategy of your organisation, how to manage risk, how to approach reserves policies, and how to ensure effective information management.
What makes charities vulnerable to failure?
Before we delve into these aspects, however, it’s worth taking a few moments to think about what makes a charity vulnerable to failure. Although all charities can be affected by economic downturns, some are more resilient than others. The key factors here are the reliability of a charity’s income streams and the flexibility of its cost base, which are often determined by its particular operating model. Here are some examples…
A charity that deals primarily with making grants, for instance, is likely to have limited overheads and more flexible commitments, and is therefore better able to deal with changes to its income. Whereas a charity that is reliant on fluctuating project-based income (i.e fundraising campaigns) and has significant fixed costs is in a far more vulnerable position.
Regardless of a charity’s operating model though, solid financial management is key in maximising its chances of coming out of a recession in a stronger, more streamlined position.
It’s vitally important that charities re-consider their overall, long-term strategy when going into a recession. Strategies are usually developed with a 3-5 year timescale in mind and may not account for unforeseen circumstances (such as a global recession). When developing an effective strategy for a downturn, charities need to cover finance, operations, and governance, as well as undertake scenario planning. Mapping out a number of potential and probable circumstances will help everyone understand where they stand when a particular scenario does occur, keeping disruption to a minimum.
And trustees shouldn’t shy away from the big questions when thinking about strategy. Questions like ‘Can we generate funds in a cost-effective way?’ and ‘Should we collaborate with other charities in our space to survive?’ should be asked.
Undertake risk assessment
Overlapping with scenario planning is risk assessment. Trustees need to understand the real financial impact of a number of different situations. Budgets containing detailed overviews of income and expenditure expectations should be drafted, as well as balance sheet and cash flow forecasts. What would happen if fundraising income dropped by 40% over the next 2 years? Which costs can be cut, and which are expected to increase? Completing a risk assessment will help your charity to answer such questions and prime itself for action should such figures materialise.
Reconsider the reserves policy
According to the Charity Commission for England and Wales, reserves are defined as ‘…part of a charity’s unrestricted funds that is freely available to spend on any of the charity’s purposes.’ In essence, reserves are funds that are put aside to meet unexpected future costs that cannot be raised elsewhere. During a downturn, they can be a lifeline for charities as donations fall and service demand increases.
Their use, however, is restricted. Reserves are only intended to be used in certain circumstances and must be maintained at a certain level. A higher-than-necessary level of reserves ties up well-needed money, whilst a low level increases the risk of a charity encountering financial difficulty and potential insolvency.
The reserves policy is stated in the annual statement of charities, and demonstrates to funders, beneficiaries, donors, and other stakeholders that your organisation has carefully considered its financial position.
In a recession, many charities decide to adopt a risk-based approach to their reserve policy. This allows for greater flexibility in how reserves are used, whilst ensuring that they don’t fall to a critically low level.
Implement an effective Management Information System (MIS)
Charities have traditionally lagged behind the private sector in using effective MIS. During a downturn, however, it’s more important than ever for decision-makers to have access to the most accurate, recent information. An effective MIS should be able to quickly generate forecasts, capital expenditure reports, and fund-raising ratios; all of these will be able to help trustees make difficult decisions in a constantly-changing situation.
Increase fundraising efforts
Regardless of wider concerns around strategy, reserves, and management information, fundraising efforts must continue and even increase during a recession. Failure to boost donation income during a downturn makes it more likely that your charity will run into financial difficulties, resulting in the inability to meet its mission statement. Whilst these are undoubtedly difficult times, there are ways that charities can alter their fundraising strategies to maximise donations; making use of digital platforms, social media, and contactless ‘tap-to-donate’ technology are just a few. Bear in mind, however, that donation habits change during recession (with smaller amounts given, and a shift towards local charities), so adapt your strategy accordingly.
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