The biggest financial risks for the charity sector

The headlines are focusing on the recovery from the pandemic and how people are coping. So far, the Chancellor of the Exchequer is trying to make sure there is enough funding to support struggling businesses while keeping inflation in check. The impact on the financial market is volatility and unpredictability.

 

There are also novel products making headlines. Cryptocurrencies like Shiba Inu are puzzling investors and trading at extreme values. Non-fungible tokens (NFTs) are also creating excitement in the art and charity scenes.

 

Cutting through the commotion, we go over the significant financial risks for charities and we look at how digital can cushion the impact.

 

 

Declining income is a threat to the sector

 

A reduction of income is a primary concern to most charities, regardless of size. Income comes from a variety of sources, including donations, services, and investments. For most charities, donations remain the most significant source of cash.

 

Grant Thornton describes the risk of a decline in income succinctly: “Insufficient income and reserves for the charity sector to achieve its strategic objectives and maintain its operations.”

 

Ecclesiastical, the charity insurer, describes the financial risks as a perfect storm. Angus Roy, charity director at Ecclesiastical Insurance says: “Charities have become used to dealing with challenges, but this year has given us a perfect storm of a loss of funding through fundraising activities, a reduction in giving from corporate partners, as well as the general public, and an increase in need has left many charities at crisis point.”

 

There is light at the end of the tunnel. While the reduction in income has left few charities unaffected, the pivot to digital has helped ease the burden. Hybrid and remote working arrangements allow charities to permanently save on operational costs. Unbound by long-term leases on offices and infrastructure, charities are spending less on the necessities.

 

 

Local authority budget cuts mean grants are drying up

 

Local authorities are already buckling under the strain of funding shortfalls. They are struggling to pay for services performed by charities. The financial risk in this situation is the reduction or elimination of grant funding.

 

Demos and the NPC have investigated the impact that local authority funding has on charities. They warn charities of this financial risk in a report titled ‘The impact of the COVID-19 pandemic on the charitable sector and its prospects for recovery’. They say: “As local authorities predict a £6bn funding shortfall for 2021, it is believed that 8 in 10 councils are at risk of bankruptcy.

 

“This could mean many services currently delivered by charitable organisations are cut back, and these charities – who have thus far been relatively protected – could find their main source of income cut off.”

 

Digital is allowing charities to address the imbalance between demand for services and limited budgets.

 

For charities facing a decline in grant funding, it’s about how digital can stretch limited resources. During the lockdown, many charities already experienced challenges in reaching out to beneficiaries and audiences.

 

The challenge accelerated tech innovations in service delivery. Online courses, therapy and support are already being offered through free videoconferencing from Zoom and Skype.

 

For many charities, the pandemic has revolutionised how they connect with audiences. Going online has allowed them to increase service delivery and reach, at a much lower cost than in-person services.

 

 

Other financial risks to watch for

 

In the world of charity finance, there’s more to watch out for.

 

Adding to income concerns and limited grant funding, inflation is one to be cautious of. It is expected to affect charity finances by increasing the costs of doing business. The Institute for Fiscal Studies (IFS) predicts that Consumer Price Index inflation will rise to 4.6% by April 2022.

 

In simple terms, charities will be paying more for everyday items and services. The IFS has put emphasis on the rising costs of energy. Charities should anticipate increases in utility bills.

 

Charities dabbling in novel financial instruments are also at risk.

 

Blockchain is still revolutionising how people value currency. Now, it’s come to heads in the art world. Non-fungible tokens (NFTs) are being explored in monetary and intrinsic value. NFTs are being used to verify ownership and the uniqueness of art in the digital world.

 

For charities, the risk works both ways – as a buyer and seller of NFTs. Charities buying NFTs for investments should be careful about volatility. The market value (i.e., what people are willing to pay for the NFT art) is subject to large swings in either direction.

 

As a seller of NFTs, charities need to be very confident that the blockchain technology is what it says it is. Fraudsters can create and copy NFTs, so buyers and sellers need to be sure that their items are truly unique.