The biggest issue facing the charity right now is the need to balance an increase in demand for services with a scarcity of funding. Find out how digital solutions can help
As we begin to feel the longer-term effects of COVID-19, the financial health of the charity sector faces one overwhelming problem: the need to balance increased demand for services with a reduction in revenue.
In the wake of COVID-19, charities face greater demand on their services than ever before. Unemployment, financial scarcity, threats of eviction, food poverty, domestic abuse and other societal issues are all on the rise due to ongoing lockdown restrictions and social distancing measures. All these issues are contributory factors to what has been described as a once-in-a-generation mental health crisis. This means that an increased number of people are calling upon charity services.
At the same time, the very resources that allow charities to offer these services are themselves under threat, with a greater number of charities competing for a shrinking pool of funds. Many charities that were once relatively financially stable have had to fold or lay off staff due to a severe disruption of traditional fundraising models; whilst even charities with a prudent reserve set aside for such a crisis will likely be burning through it at an alarming rate.
This problem is exacerbated by the fact that lockdown restrictions and social distancing guidelines have presented a number of operational and logistical challenges to charity leaders. This only increases the financial commitments charities have to make and means that those in charge of the finance function will have to stretch budgets even further.
There is no magic cure for this state of affairs; no silver bullet to stop the crisis dead in its tracks. But the cumulative impact of adopting a number of digital solutions in a holistic manner can ease the financial.
One of these is the automation of finance management, which can save charities time and money, and help them to plan for a more sustainable future.
It is perhaps most helpful to view a switch to automated financial processes as one part of a wider campaign of digital transformation.
The pandemic has accelerated the adoption of digital methods in nearly all areas of charity operations. The obvious examples are the fields of fundraising, service delivery and back office operations. These are practices that simply could not be carried out as normal in the wake of COVID-19. It is in these areas that digital was first adopted, more out of necessity than anything else.
But the biggest obstacle to digital transformation in most non-profit organisations is a reluctance to change, or a cautiousness that discourages risk taking. One of the major benefits of the sudden shift into digital is that these solutions no longer seem so radical. As organisations become more comfortable with digital in general, and begin to see the efficiencies and improvements it can bring in certain areas, they become more enthusiastic about rolling it out across the organisation and into other areas of operations. Areas such as finance.
Our research indicates that impact reporting is the one of the biggest problem areas in the sector. Many non-profits are failing to explicitly state their organisation’s financial performance indicators and objectives in their annual reports. This can lead to a crisis of accountability with devastating effects on a charity’s ability to build a sustainable future. These findings are supported by independent research already conducted on the UK charity sector.
The most obvious problem will be that you simply don’t know how much money you need. Without clear and detailed impact reporting, it will be difficult to estimate what your operational expenses will be for the coming year, even with a rudimentary budget in place. Dig a little deeper and you’ll find you may be wasting large sums of money on ineffective campaigns—money that could be better invested elsewhere. Better impact reporting will help you plan for the future and begin building a prudent reserve to help you navigate future crises.
Without detailed financial records, charities will also be at a disadvantage when applying for further funding. Because they will be unable to provide transparency to stakeholders, both internal and external, they will be a less appealing prospect than an organisation with better financial record keeping and projections. In an increasingly crowded funding landscape, this is a major problem.
This is the difference between sustainable and reactive approaches to finance management: The more detailed your bookkeeping, the more financial data you will have. The more data you have, the more informed your decision-making and planning process will be.
That is not to say that organisations with a sustainable financial model won’t face challenges. But they will be in a better position to get through them, and they are more likely to be able to do so without major changes to strategy.
In the end, a sustainable financial model is just another way of safeguarding your commitment to your beneficiaries, and your ability to provide services to them in these difficult times.
The biggest obstacle to improving the level of organisational financial literacy is that of capacity. Many charities, particularly amongst smaller organisations find that they do not have the time or resources to dedicate to improving their finance management. Even if the leaders of these organisations can be convinced of the importance of improving finance management, without a change in process, this will seem like an unattainable goal.
Finance management software (such as Sage Intacct) can help to overcome these capacity issues by automating vital processes. This can help to free up worked hours, allowing workers responsible for the finance function a choice between improving their personal level of financial understanding and adopting more sophisticated processes (to deliver more detailed and valuable reports) and directing their efforts elsewhere, to help other areas of the organisation.
Among the central principles guiding charity leadership, the most important is delivering services to beneficiaries, as efficiently as possible. This means reducing waste, improving delivery mechanisms and cutting costs wherever possible.
Better finance management processes can achieve greater organisational efficiency, in the form of reduced waste and increased savings both in terms of time and money (taken together as ‘capacity’).
This can allow leaders to dedicate these resources elsewhere, improving the quality or extent of service delivery on offer.
Download the Sage and Charity Digital OFL report here