As inflation continues to rise and charities face rapidly increasing costs, Louise Casey, partner at Mitchell Charlesworth, discusses how charities can prepare for the challenges ahead.
The latest figures from the Office for National Statistics showed inflation in the UK hit a 40-year high of 9% in April and The Bank of England has warned that UK inflation could reach 10% in the last three months of 2022. Millions of people across the UK are facing soaring energy costs, an increase in national insurance contributions and rising food prices which are putting increasing pressure on household budgets.
The rise in inflation presents a number of issues for charities.
As a result of the cost of living crisis, people have less disposable income and many will stop non-essential expenditure, such as charity donations or visiting theatres, museums or exhibitions. Many people who were already struggling financially will turn to charities for help. This will result in some charities facing greater demand for support, whilst trying to maintain services with a cut in donations.
Charities also need to factor in increases in business rates and energy supplies as well as consider higher staff costs as a result of the rise in national insurance from April 2022 (which becomes the Health and Social Care Levy in April 2023) and potential salary increases to help employees keep up with escalating prices.
What can the charity sector do to protect itself from rising inflation?
There are a number of ways charities can prepare for the issues they are facing.
Robust financial strategy planning
Inflation can put a massive strain on a charity’s income and operating model so charities need to be more robust in their financial strategy planning. It is essential that you understand your charity’s financial position and have a good overall view of the financial health of the organisation. This will reveal any major risks or problems which may need urgent action and enable you to plan accordingly.
Monitor cashflow and create budgets to assess financial viability
Frequent cashflow monitoring and review will help you manage your finances.
Your charity should have a budget demonstrating the charitable activities, trading income and most importantly expenses. A lot of charities find forecasting difficult, given the unpredictable and ad hoc nature of income streams. However, reviewing past trends, patterns of income and fundraising/ planned activities, along with working from costs up, you can set a realistic budget forecast which can be monitored at regular periods. Reviewing how much your charity receives and spends against the budget enables you to identify problems quickly and agree a solution and change in strategy to bring activities back on course.
Once the budget is set, it is important that the various assumptions and estimations used are stress tested and flexed to take into account uncertainties and risk. Inflationary increases we are seeing now would have been hard to predict this time last year, therefore regular review and flexing of budgets ensures key objectives are met, and boards can make strategic decisions.
Diversification of income
Income diversification can help to build a secure financial future for your charity. A good mix of income from diverse sources will reduce the risk of shortfalls in predicted income. Income can be generated from several sources, including grants, government funding, online fundraising, public donations, retail/online trading and securing corporate partnerships, to name but a few.
Charities with substantial cash reserves should review their investment strategies to make these reserves work harder as inflation rises.
Against this challenging backdrop, it is important that charities continue to adapt and evolve so they can operate successfully. Our team of specialist professional advisors are on hand to offer advice and support on achieving your objectives. Please contact a member of the team below:
