Bumpy financial road ahead for the sector

Rising costs are hurting many charities, forcing them to rethink financial strategies, finds Liam Kay

Charities have been saddled with various financial burdens over the past few years, with more set to arrive in the year ahead. A recent report from the National Council for Voluntary Organisations, called The Road Ahead: What Will 2017 Mean for Charities?, identifies rising inflation and reduced public sector funding as major challenges facing the charity sector in 2017. Several new tax and policy changes will affect the sector, such as rises in insurance premium tax and the national living wage.

To understand some of the financial pressures charities face, Third Sector spoke to three charities.

Rising demand and costs in social care have been reported widely in the media over the past few months. An extra £2bn of funding was announced in this year's Budget to alleviate some of the problems the sector faces.

Wyn Jones (right), director of finance at the adult social care charity Making Space, says there are a number of demands on the social care sector that are stretching the budgets of charities working in the area. For example, his charity, which had an income of £23.6m in the year to 31 March 2016, will be paying a total of £96,000 on Care Quality Commission fees this year, an increase of £36,000 on the previous total. The increase in the national living wage to £7.50 an hour has added to the charity's outgoings.

"We've committed to paying at least 20p above the national living wage, and that's quite a challenge for us to do financially," says Jones. "Three years ago we were very competitive on pay; now we are only just above most of the competition."

Contract stagnation

An even bigger problem is the long-term stagnation of contracts from the NHS and local government. Jones says that a typical NHS contract includes a 2.6 per cent increase every year to account for inflation, but this is offset by a 2.5 per cent savings requirement, which means the real increase in income is just 0.1 per cent a year.

The charity was initially able to make the efficiency savings required, but Jones says there is now "no fat in the system" and the charity has had to persuade some NHS commissioners to remove the savings requirement from its contracts, arguing that the charity is already as efficient as possible. There is an awareness of the pressure social care faces, Jones says, but the focus has mainly been on the demand for services. He believes the biggest problem is that people who require help are not being supported by the system.

"I think the challenge is what we mean by demand," he says. "Is there increasing need? Yes. Is that increasing demand being commissioned? No. What we're actually finding is people who we would have been funded to support three years ago don't qualify for funding any more because the threshold for funding has been raised. The need is there, but for us the funding to meet that need isn't there any more."

Fiona Johnson (left), finance manager at the care home charity Cedars Castle Hill, says the financial problems in the social care sector are even more acute for small charities. Hers, which had an income of £2.2m in the year to 31 March 2016, is struggling and has been "cut to the bone" to cope with an increasingly difficult financial situation.

She says: "If I was running a private sector business, I'd have pulled out of the sector a year ago, and probably earlier than that. There are other charities that do what we do, but they are slightly larger and probably get more economies of scale than us."

Large charities are also feeling the strain. Charles Scott, managing director of corporate shared services at Action for Children, highlights the impact of the apprenticeship levy, which came into effect in April and forces employers with wage bills of at least £3m to pay 0.5 per cent of their overall payroll amount to the government to fund apprenticeship schemes.

Scott (right) says the levy will be expensive for the charity. It also comes at a time when fundraising regulation and the reduced value of government contracts are affecting its resources. He says the only way to mitigate the cost of the levy is to take on apprentices - which could be hard for some charities - and take this from the charity's training budget. Jones says the levy has added £80,000 to Making Space's spending.

Scott says more indirect financial burdens are also causing concern. Increases in inflation and the price of oil could have several effects, from pushing up wages to making it more expensive to repair buildings, buy supplies and travel for work. A further problem for some charities, such as those working in international development, is that sterling's loss in value will make contracts with organisations abroad less viable and weaken the charity's purchasing power when operating overseas.

But Scott argues that the most damaging effect of inflation for many charities will be increases in their pension deficits. "If pension deficits increase, which they will, that will have a drastic effect on charities'

reserves and therefore their ability to invest in longer-term things such as fundraising, brand and income generation," he says. "That could be huge for many charities.

"If interest rates were to increase to counteract increasing inflation, that also affects property prices: lots of charities rely on property prices for legacies. A lot of charities hold their reserves as property, so they don't want prices to go down."

Mitigation

What can charities do to mitigate these additional financial burdens? Scott says that Action for Children has done three things to increase its efficiency: used IT and mobile working better to allow it to reduce its property costs; become more VAT-efficient and diversified its income; and improved processes to make efficiency savings across the organisation.

Scott is also a trustee of the counselling charity Relate. He says it can be a lot harder for smaller charities to make efficiency savings, with some reliant on a small number of income sources. Here, mergers or partnerships with other charities can help to make service delivery and back-office savings without affecting beneficiaries.

"I think there's an ultimate consequence of increasing costs: merger and consolidation," Scott says. "And I think that has to be a good thing."

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