Charity finance in 2020: Will it be the most challenging year yet?

The charity sector, like much of the rest of the UK, faces a challenging 2020. And at present, most of the big challenges faced by the wider sector impact on the finance department. For the Charity Finance Group, it is clear that there are several significant structural issues which will concern many FDs in 2020.

A difficult wider environment

The legacy of austerity and Brexit has left state provision weakened and reform deadlocked, and widened systemic disadvantage across the country. This has impacted on charitable services, and increased beneficiary need. Following the election result, it’s likely there will be an influx of cash to reverse some of this, but it’s not just a financial problem. Alleviating the growing burden on charities would also involve huge reform to the rules on benefits, housing, social care, employment and taxation – just for starters – and it’s hard to see that happening overnight. For FDs, this translates into a simple imperative: there’s a need to spend, and the cash for it has to be found from somewhere.

Funding challenges

Unfortunately, several sources of charity income have seen a hit in recent years. Fundraising income has not taken a dramatic hit after newspaper criticism and regulatory reform, but it has seen a blip. But much more serious is the state of the commissioning environment.
Badly hit local authorities have been passing on their budget cuts to charities, and we increasingly see a struggle to even achieve full cost recovery. Contracts are increasingly large-scale and short-term, and payment by results is a growing problem.

There are also myriad employment issues connected to commissioning, with many charities being asked to take on workers under TUPE, too often with significant pension liabilities.

Scrutiny, trust and accountability

The charity sector as a whole has come under scrutiny as never before. Newspapers are increasingly ready to print hostile stories, the Charity Commission is toughening its language, and there is no obvious sign of an end to criticism. While we view the top line trust figures with considerable scepticism, there is relatively good evidence of public concern around the very large household name charities, and we believe that the sector must accept that some – though by no means all – is well-placed.

This might seem like an issue primarily for the communications department, not for finance, but we believe that this is a problem the FD has to engage with fully. At present, scrutiny of charities’ compliance can often be strong, but scrutiny of public benefit is relatively weak. Charities have a regulator which receives only one sixth of the funding of other comparably sized sectors, and which is struggling as a result to keep abreast of its caseload. As a result, often the only tool for scrutinising a charity is the annual report and accounts. So the work of the FD is integral to creating trust.

This is a problem to be addressed on several fronts. First, understanding to what extent there is real concern over charities, and to what extent public anxiety is simply driven by the press. Second, acknowledging that there is likely to be an accountability gap which needs to be bridged, and understanding what combination of regulatory reform, better reporting and better communication is needed to bridge that gap. And third, acknowledging that there are weaknesses in our sector, and that we must address them.

Core functions

One of the issues raised in the press, which is surely without foundation is the idea that charities do not spend enough money ‘on the cause’. If anything, the reverse is true. Charities have tended over the years to push too much money to the front line, and under-invested in management and systems. Almost every crisis in the papers over the last few years can be traced to a failure of a so-called boring back-office function: safeguarding, governance, data protection, cyber-security, due diligence, risk assessment.

Sadly, too much funding comes with the stipulation that it cannot be spent on properly resourcing the central functions, and so it remains a constant challenge for finance directors to ensure that charities can and do spend what they need in these areas, and are able to make the case for doing so.

Staffing

Quite a few issues cluster under this heading, many of them connected to the headings above. First, a rising minimum wage is likely to disproportionately affect charities. Unfortunately, our sector pays a quarter of staff less than the Real Living Wage, largely due to funding constraints from partner organisations, and we will need to have a real conversation about this with those partners.

Recruitment and retention of staff is also a problem, with many finance departments reporting they must recruit from outside the sector to get the skills they need. Perhaps because charities struggle to invest in training and development. Perhaps because finance for charities is a complex discipline with a steep learning curve.

Finance directors are also often responsible for HR issues, and here they have to confront the growing pressure on charities to recruit better. It’s not enough for us to engage in hand-wringing over the lack of diversity in our sector. We need action, and that requires reform of policies and processes, which needs the engagement of FDs.

And finally, at the other end of the scale, there remains the potential issue of executive pay, which could easily once again come under scrutiny. Developing remunerations policies which suit all stakeholders is increasingly difficult, and may well in some cases be impossible.

So what next?

How these problems fall out over the next year is largely down to the wider environment. The result of the election will have a huge bearing on the wider political environment, which will in turn affect the funding environment. For many charities, though, these will be issues to be wrestled with not just through 2020, but well into the next decade, and in some cases, beyond.

Written by David Ainsworth, sector specialist at Charity Finance Group

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