How charities can cope when unrestricted funds are falling
A major challenge the Coronavirus has brought for charities is that fundraising, as well as trading income, has taken a major hit. In many cases, service delivery has needed to stop, also bringing a slow-down in income. Some charities are seeing opportunity and growth but many are turning to their unrestricted reserves to see them through.
Charities are also feeling compelled to ramp up existing or new services to help clients and beneficiaries, just when they do not have the money to do this. This strategy can only work for so long.
This is a tough place to be in but there are some things charities can do to minimise losses and preserve unrestricted funds, as well as thinking to the longer term.
Managing income streams effectively
Charities need to secure their key income streams and focus doggedly on them. From a financial perspective, reforecasting every month will help them understand where they are financially and keep them on track.
Many charities produce management information infrequently so this needs to become much more dynamic. This may require producing information that is ‘good enough’ rather than exact to the pound. Information should also focus on what matters and inform decision-making (clearly linking the two).
Research by Cass Business School has highlighted that ‘predictable’ income streams are everything, without which charities concentrate solely on survival. Income streams divide into predictable and unpredictable, with charities needing to make their best forecast for the future on these. They may need to create different scenarios from this and respond accordingly.
Fundraising could be looked at from a different angle. Clear messaging and asks to trusts, foundations, corporates, high net worth individuals and the general public are key. Charities should talk about the issues and challenges as well as the positives. They should also talk about the impact of their work, not just the money.
Focusing on cash flow
Cash is king and understanding cash flow is critical. Perhaps day centres or shops have provided considerable cash in the past but have had to close in the short term, possibly with a major impact on a charity’s business model.
Cash flow information needs to be good enough to take decisions on. The luxury of only looking at this every quarter may be a thing of the past. It may need looking at every few days now.
Asking funders to provide funding in advance, or mobilisation payment, can help take pressure off cash flow, and ease the use of precious unrestricted reserves.
Developing good cost recovery practices
From our advisory work, we estimate that about a third of all charities do not understand their overheads or the profitability of activities (whether they make a surplus or generate a deficit after allocating overheads). Decisions on which services to stop or hold back on should be informed by what surplus they create, cross-referenced against the impact they deliver.
Many grants and contracts only allow charities to claim overheads as they spend. This can slow down recovery of overheads and drain unrestricted reserves. Talking to funders about the real pressures a charity is under may result in more flexibility and willingness to help.
Charities also regularly cost to what they think a donor will fund rather than understanding what a project will really cost. A fair proportion of overhead is money that should be claimable from donors and built into budgets, especially with emergency grants. Items such as quality costs, costs of volunteers and impact measurement are often forgotten but should be included.
Regarding the sign-off of bid submissions, charities should ensure any subsidy is transparent and a good use of unrestricted reserves. This is often a hidden cost and a good sign-off process is the single biggest change charities can make to ensure they recover all costs.
Managing reserves effectively
Charities will hopefully have been prudent and built up some reserves in the relatively good times. Now that it’s raining heavily on the economy, they can use some of these reserves to help. But how much to spend? It’s a difficult balance.
Charities can use reserves to work through issues, carefully investing to navigate the choppy waters. Alternatively, restricted funds could be used in a more creative way or to pay for more overheads than previously. Funders often want to help, so talking to them about how to take advantage of this is a good step.
Reducing costs
Working through budgets and reforecasts line by line is crucial. Knowing what sits in budget lines is a necessity. Unnecessary expenditure can be held back while protecting infrastructure and revenue generation.
Many charities are furloughing staff, using the appropriate funding. If it is eventually necessary to make changes to the workforce, asking people to reduce their hours or pay, or even to take unpaid leave can hold back costs.
Charities needing to cut costs should cut boldly and deeply where possible or needed but core capacity should be funded and retained. Legal advice should be sought to ensure that any changes are made appropriately.
Looking to the future (and efficiency or reimagination)
Longer-term actions that charities can take include focusing on greater efficiency through consolidating back office, outsourcing or investing in new technology. These are not short-term measures and take time and investment to implement properly.
Ultimately, the worst of the Coronavirus impact on charities will pass and the world will look different. Charities can use this time to reimagine their future and start to change for the better and for the new context.
For further guidance, we’re here to help. Contact us today.