How to navigate the future in a financial crisis

The ins and outs of the cost-of-living crisis are difficult to predict. It is a time of great uncertainty for the charity sector, as donors look likely to pull back donations and user demand looks likely to rise. That presents a huge challenge to the charity sector, which will prove tough to meet. 

Charities will need to adapt to difficult circumstances, find new revenue streams, and broadly mitigate upcoming risks. When it comes to budgeting, and preparing for the future, financial forecasting will be invaluable. 

Many charities have already adopted approaches to financial forecasting, such as children’s charity Barnado’s. Barnardo’s revealed in its 2021 Annual Report that, during COVID-19, its regular risk-mapping exercises included “regular financial modelling against a range of scenarios and putting in place agreed actions under each scenario”. 

It’s still not fully known how the cost-of-living crisis will affect charities – though research from earlier in the year suggests that many donors are concerned they won’t be able to donate amid financial uncertainty. But financial forecasting and modelling can help charities be prepared for what is to come and to protect itself as much as possible against the impact of rising inflation.  

Charities should use forecasting and look at ‘What-if’ scenarios particularly in times of crisis, enabling them to keep track of their cash position, plan for new staff, adapt their fundraising approaches, and propose new income streams, whether that’s investing in merchandising or online challenge events.  

Financial forecasting can also help charity boards and trustees understand more deeply the situation and direction of the organisation, and even help secure further investment from grant funds, who can see that your charity is fiscally responsible and prepared for each eventuality.  

When overall efficiency is the most researched element about a charity, then it is vital that charities are looking after their funds and using them to deliver the most impact for their service users.  

Keep an eye on your reserves 

Research by the Charities Aid Foundation found that nearly one in four charities used reserves to help them through the pandemic.

However, another poll from autumn 2020 found that only 23% of charities said they were building up reserves further in case of future crises, with their focus largely on getting through COVID-19 rather than thinking ahead to the current situation. Yet half of charities said they were concerned about the impact of inflation on their savings even then.  

According to financial software providers Calxa, thinking of cash reserves in terms of days is an important KPI (or Key Performance Indicator) to include on your balance sheet. It essentially tells you how many days your organisation could last if income suddenly dried up. 

As Calxa point out, “Every dollar (or pound or euro) in the bank is one that could save you in a crisis”. It’s vital to monitor reserves regularly – though not necessarily every week or month – so you can understand your position in a crisis. It will inform your fundraising strategy, how you adapt, and the steps you can take to prevent financial collapse. 

In times of crisis, it is vital that charities are able to fully communicate the urgency of their cause, but particularly if they face not being able to help due to lack of funds. If they can translate this to their supporters, and demonstrate how their work helps the situation, they can boost donations further and deliver more services where they are needed.  

Access Calxa Here