Four ways inflation will affect your charity

Inflation can play havoc with your charity’s finances in many different ways. Some – like rising energy bills and increasing supply costs – may be obvious, while others may be less immediately noticeable.

Here are four of the most significant ways inflation can present serious challenges to your charity’s activities.

Your charity’s real income drops rapidly

When economists talk about “real” income, they mean the value of the income – what it can buy. Your charity’s “nominal” income – the amount in pounds and pence – may be unchanged or even rising, but in times of high inflation like today the value of that nominal income may be less, so your charity’s real income may be falling.

To get this into perspective, the average charitable donation is £20, and has been since 2017, according to Pro Bono Economics. With the current high rate of inflation a £20 donation in 2017’s money will be worth just £15.30 in real terms this year, and just £14.90 next year, using Bank of England inflation forecasts. 

So that means that repeat givers who set up direct debits a few years ago, or who are in the habit of making donations of similar amounts every year, will actually be giving about 25% less in real terms this year – so your charity’s income from these donors will have fallen by about 25% in real terms.

What you can do: The solution is to find new donors, and to increase the average donations made by existing donors. Possible methods for the latter include increasing the “suggested donation” options, and asking donors with direct debits to consider increasing their monthly or annual contributions.

Your charity’s funding is worth less

Grant funding is the lifeblood of many charities, and numerous grants  are awarded on a multi-year basis. This allows charities to make plans and embark on long-term projects. Fixed annual grants are awarded with the underlying assumption that inflation will be low or on the understanding that the real value of each annual payment will decline over time if inflation is high.

The problem is that many charities did not expect high inflation when they made their grant applications and therefore did not expect the real value of each payment to decline so rapidly. For example, if your charity successfully applied for a three-year grant of £10,000 per year last year, the real value of this year’s grant payment will be about £9060, and around £8830 next year.

The same is true of multi-year contracts that charities may enter into to supply services, perhaps to public authorities. If your charity agreed last year to supply specific services to a local authority for £100,00 per year for three years, then the value of the payment next year would only be about £88,000. This shortfall in real terms could leave your charity struggling to be able to satisfy the terms of its contract.

What you can do: Make sure that you take inflation into account when making grant applications and bids for service contracts. You can do this by calculating costs in real terms rather than nominal terms over the course of the contract or for the duration of the grant period.

The value of your charity’s reserves falls

Charities can use their own cash reserves as a buffer to protect themselves against cash shortfalls due to the falling value of donations, grants and contract payments. But it’s important to remember that these reserves fall in value rapidly during times of high inflation. In the first half of 2022 about £5.7 billion was donated to UK charities, and if that money was simply used to build up reserves then it was worth about £500 million less by the end of 2022, according to Bank of England inflation figures.

That means that many charities are left between a rock and a hard place due to inflation – they need reserves to protect themselves from the effects of inflation, but these reserves diminish in value alarmingly rapidly at current inflation levels.

There’s another problem too. The pandemic of the last two years resulted in almost a quarter of all charities using some of their reserves up in order to survive, and by early 2021 about 28% of charities with incomes over £500,000 had either no reserves or negative reserves meaning they actually owed money, according to Pro Bono Economics.  This leaves these charities particularly financially vulnerable (although high inflation also reduces the real value of debts, making them, in theory, easier to repay.)

What you can do: Since inflation erodes the real value of reserves rapidly, aim to raise the absolute minimum in reserves that you might need to tide your charity over financially during difficult periods.

Your charity faces rising staff costs

Replenishing reserves to a sensible level that allows for financial security in the face of income that can vary unpredictably month by month is important. But high inflation makes this very difficult for many charities to achieve in practice.

That’s because of the extreme rate that costs are rising. Energy bills are particularly high at the moment due to the war in Ukraine, but staff costs – usually one of the biggest costs that charities face – are a particular problem.

If the UK charity sector is to increase staff salaries and wages to keep up with inflation then it will have to pay £3.8 billion more than last year, and £6.1 billion more next year, according to Pro Bono Economics. That’s an astonishingly large amount of extra money to find, at a time when the cost of living crisis is making it harder, rather than easier, for donors to increase their donation levels.

What you can do: there is no easy solution to rising staff costs. The reality is that your charity has to agree fair wages and salaries with staff. Possible options include reducing head counts, increasing part-time working, and making use of volunteers.