How will rising inflation affect your charity?
Costs will rise - Inflation is a measure of how much the price of goods and services increase over time; so as rates soar, so too will your costs. In the charity sector, according to the NCVO, staffing costs account for 37% of total expenditure, so any increase in pay to ensure your teams are not worse off could have a profound impact on the finances of your charity. But if you avoid increasing wages, there is a risk staff will leave and you will struggle to replace them. In addition to higher staff costs, you will need to factor in increases in business rates, materials and energy supplies.
Income from fundraising and donations could fall - As household budgets come under increasing pressure, people will have less disposable income and those struggling will inevitably stop non-essential expenditure. This means that, once again, the sector is likely to see a knock to donations and fundraising efforts.
Demand for services may increase - The vulnerable will likely be the hardest hit by the rise in inflation, which in turn is likely to drive up the demand for many charities’ services. This will result in some charities facing greater demand for support, whilst trying to maintain services with a reduction in donations.
What can you do to protect your charity?
The sharp spike in inflation could put a real strain on your income. When it comes to keeping your charity up and running, knowing the right questions to ask and where to find the information you need can make all the difference.
It is essential that you have a good overall understanding of the financial health of your charity. When planning budgets, factor higher than anticipated costs into any assumptions and review every cost from the bottom up, with a view to cutting and saving, where possible.
Prepare regular cashflow forecasts to assess financial viability, whether it be on a sheet of paper or using one of the latest software models (or ask for our help!). You need to always have a clear idea of how cash will flow in and out over the coming months. Reviewing how much your charity receives and spends against your budget enables you to identify problems quickly and agree a solution and change in strategy to bring activities back on course.
It is also essential that you have set a strong reserves policy, and for this to be reviewed regularly to ensure that too much or too little is not being set aside.
As a minimum:
- Have a good understanding of your charity’s financial position and a strong reserves policy.
- Factor higher than anticipated costs into any planning assumptions.
- Determine if the demand for your services is likely to change and plan for it.
- Revise income targets and plan how to deliver your services in the context of higher costs and lower income.
What else can I do as a Trustee?
As a trustee, you have a legal duty to look after your charity’s money and other assets. This means identifying and acting on opportunities for strategic, operational and financial change, as necessary. If, in your review of the financial health of the charity, any major risks or problems are identified, it is important to take action as early as possible.
In our 2022/23 Charity and NFP Outlook, we look at more detail about the key areas you should be considering in order to future proof your charity. Click on the link below and turn to page 5 for some practical tips and advice to help you ensure your charity is prepared.