How would you handle cuts of more than £12m across a range of contracts at a time of increasing demand on your services?
This was the situation Nick Swarbrick, chief finance officer at the health and social care charity Turning Point, had to confront last year. The charity, which had an income of £100.5m in the year to 31 March 2015, operates in a similar way to social enterprises: it is reliant on contracts rather than fundraising or grants.
This has insulated it from some issues affecting charities, such as the fallout from last year's fundraising scandals - but not all.
"In 2015/16, we had 12 contracts that were all subject to funding cuts of more than £1m," Swarbrick says. "In absolute and relative terms, the numbers are big."
Income cuts, which he says have ranged from 2 per cent to 22 per cent of a contract, are one of the main issues Swarbrick identifies, particularly given that Turning Point's contracts are mainly with councils and the NHS, which both have their own funding pressures. He says this means the value of contracts is often cut on renewal, and in some cases during a contract.
This coincides with increased costs, particularly, in Turning Point's case, from the living wage, which was introduced this April, and the apprenticeship levy, which arrives in April 2017. Another issue is the cost of transformation when a new contract is won.
Swarbrick says there is often no extra time or funding to deliver a new contract. "Historically, contracts came with set-up costs and transformation funding," he says. "There was a recognition that trying to do something differently would take additional funds. It is now extremely rare to get that funding, so you need to absorb those costs in the contract."
But Swarbrick says these issues are not insurmountable, so long as a careful balance is struck between short-term financial necessity and long-term service delivery. His bid team, he says, has invested time and effort in new models of service delivery to maintain and even improve results, despite funding pressures. For his finance department, this includes working more closely with front-line operational staff. For Turning Point, it means more internal and external partnership work. Swarbrick says that funding cuts, though challenging, have driven creativity in service delivery, with impressive results so far.
"Organisationally, the back office has improved, front-end delivery has improved and our external relationships have expanded," he says. "We have managed to grow quite significantly year on year, even with all the challenges we've had."
Swarbrick says he is "cautiously optimistic" about the future, but further funding cuts would be catastrophic. "We are getting to a level at which further cuts will make it unsustainable," he says. "We've had to walk away from a number of opportunities because we could not make them work.
"We can't say 'this is the income level and we want all the same activity'. We can get to that income level only if we stop activities. If you are not taking service users on a journey where you can improve what they do, the costs will be greater."