Why charities can't afford to ignore finances

Finance is the lifeblood of every organisation. The charity finance or treasury function counts every pound coming in and ensures that funds are well spent.

 

Lack of controls, budgeting, mismanagement, and unpredictability are enemies of good financial management. Equally, burying your head in the sand to the state of finances can be very harmful, and, in some cases, lead to insolvency.

 

Highlighting some of the financial dangers, we suggest how digital can help overcome challenges.

 

 

Charity finances today

 

The biggest threats to the bottom line are the cost-of-living crisis, funding squeeze, and not keeping up with digital transformation.

 

The cost-of-living crisis and funding squeeze taken together, has meant that charities are struggling to keep up with payments while competing for few grants and funding pools. The general public has also faced higher costs, so donors may not be as generous as in previous years.

 

The other danger that charity finances and operations face is not keeping up with digital transformation. The risk here is that while audiences increasingly prefer social media and digital payments, charities are not on digital communications platforms and are still using cash and cheques.

 

The financial dangers that charities face today simply cannot be ignored.

 

 

Pay attention to finances when expenses over take income

 

Those struggling to contain or control their financial situations run into trouble. Earlier this year, we’ve seen that even the stalwarts can be vulnerable. Twenty-five-year-old charity Jo’s Cervical Cancer Trust announced the news that they were winding down due to financial challenges.

 

On their website, they reflect that: “despite our unwavering commitment and dedication, the financial challenges we face have become insurmountable, leading us to the difficult decision to place the charity into insolvency.”

 

Digging a bit deeper, the charity had significant shortfalls. According to UK Charity Commission data, the total income of £1,360,286 was exceeded by expenses by approximately £245,470. Of this, charitable activities were the greatest expense. In the financial year ending 2022, these cost the charity nearly £1,250,000– very narrowly just as much as its income.

 

The charity closed immediately, leaving behind a legacy of cervical cancer awareness and support for those impacted by the disease.

 

 

Combinations of unfortunate events

 

Like Jo’s Cervical Cancer Trust, two other charities succumbed to financial problems. The Cares Family, open for 12 years, was a collection of charities working together to combat loneliness. The focus was to bring in those in the community to foster ties and enjoy social events. They helped some 30,000 people across London and Manchester.

 

The Cares Family CEO Nicola Upton is reported to have written to staff: “The insolvency of the charities has come about due to long-term financial challenges, the current cost-of-living crisis, and the increasing competition for funds from all sources.”

 

The concoction of factors has also negatively impacted Raleigh International, a purpose-led youth expedition organisation. They closed down because COVID-19 had obstructed their work and opportunities abroad. Travel restrictions, cancelled foreign aid, and scrapped programmes contributed to the decline in financial health.

 

Neither charity was able to predict the dire circumstances of closure. Both had to be put into administration suddenly and became victims of unfortunate events.

 

 

What digital can help with in terms of finance

 

While it’s unlikely that digital alone could have saved any of the charities mentioned, technology can provide transparency, budget control, and foresight.

 

Financial management platforms are for charity finances of any size. Many of them automate financial processes and make quick work out of the expense matching, reconciliation, and three-statement reporting. For simple operations, go for Xero or Quickbooks. Those with complex accounting and cross-border legal entities could consider SAP or Sage.

 

Financial management platforms also offer an opportunity for controllers to look at trends. New platforms powered by AI and machine learning can spot errors and make clever forecasts based on real information. Planful, a US-based software company does exactly that. Companies using the service benefit from “smarter” automation. 

 

 

Finance and planning for fundraising

 

Sensible budgeting shouldn’t be ignored. In our step-by-step approach, we tackle how to think about income, allocation of funds, and priorities. From there, finance managers can start controlling investments and spend.

 

Investing in fundraising is crucial to financing.

 

Take a closer look at the fundraising strategy. Fundraising strategies are vital to identifying how you will meet the needs of your service users, making the most of broader trends.

 

From a financial perspective, that means continuing to budget accurately for the amount of money it costs to continue running events, donor and legacy programmes. The aim is to accurately plan to maintain and grow the income streams. In looking at costs, account for inflation, pay rises, and general cushioning.