Navigating financial challenges: Charities in the UK

Charities play an undeniably important role in our society. Amongst other things, they provide support to some of the most vulnerable, provide new opportunities and increase access to skills and technology, and provide important services that otherwise may be lost to the people who need them.

The charity sector has not, however, been immune to the broader issues impacting the UK economy. The pandemic proved a trying time for many charities, as a number of traditional fundraising routes dried up amidst social distancing and lockdowns, but the sluggish pace of the post-pandemic economy has left many continuing to feel the pinch. In this article, I’ll look at some of the financial challenges charities face, consider ways in which red flags can be addressed head on, and look at some of the additional concerns that may not be immediately apparent.

1. Macroeconomic issues: it is easy – and not always accurate – to place an organisation’s financial troubles at the feet of the current economic circumstances, however in this instance the impact of various economic issues arriving all at once is unavoidable. Charities have found themselves squeezed by rising costs – from energy to staffing costs, rents to interest rates – at the same time that their donors, real or prospective, face similar financial challenges. In a cost-of-living crisis, perceived non-essential spending is often the first to be cut, and many charities have seen growing challenges in meeting their fundraising goals through traditional means. This has a direct impact on charities already struggling with their own overheads. 
2. Reduction in government funding: voluntary sector funding by the UK government has been declining for a number of years, and with the possibility of ‘stagflation’ in the UK economy, this trend seems likely to continue. This is problematic not just because of the reduction in central funding, but because it occurs at the same time that charities are seeing a reduction in public donations (per point 1).
3. Increasing demand for services: for many charities, there has been a notable increase in demand for their services just as they find financial red flags starting to pop up. Community food banks, for instance, saw a reported 37% increase in the number of 3-day emergency parcels distributed versus the previous year, according to the data from The Trussell Trust (Food Banks in the UK - House of Commons Library (parliament.uk)). Continuing to meet the needs of communities places further strain on potentially already difficult finances.
4. Gaps in other services: relating to point three, in November ’23, the Guardian newspaper further reported that many charities are increasingly plugging gaps in local authority and NHS-provided services (English charities ‘near insolvency’ after subsidising public sector contracts | Charities | The Guardian). Given the aforementioned fall in government funding, this necessarily means that publicly donated funds are further eaten into.

In spite of these challenging circumstances, there are some options available to charity trustees to help to mitigate the risks and meet difficulties head on. As traditional fundraising continues to prove difficult, there are opportunities to innovate, considering how the target market engages with content, messaging, advertisements and giving in a digital and post-pandemic age. Changing what has previously been a tried-and-true model is not always easy, but an honest, possibly external appraisal can identify gaps and opportunities that perhaps would have otherwise gone unnoticed. 

Robust financial planning, whilst always important, is even more so when income streams are drying up. A review of relevant governance policies, such as a Reserves policy, should be undertaken. Financial resilience can be further strengthened through diversification, which can work in tandem with innovation in fundraising. Where charities are engaged in contracts, trustees should be clear on the terms and should not be afraid to negotiate. 

Recognising and understanding the role and duties of the trustees themselves is also crucial when faced with financial headwinds. The risks to trustees themselves in the event of an insolvency, where they have been deemed to have failed in their own duties, can be significant. Different rules apply to insolvency depending upon whether you are incorporated or unincorporated. Trustees should consider their personal liabilities and take steps to protect their position should the worst-case scenario arise.

Perhaps most importantly, trustees should not be afraid to seek expert advice. Our lawyers can support charities with understanding and negotiating contractual terms, handling disputes, managing your obligations as an employer, keeping up to date with ESG considerations, understanding your duties, or managing your financial circumstances. Crucially, where you see signs of adverse financial headwinds, engaging with advisers at the earliest opportunity is key. Taking advice early can be the difference between insolvency and continuing to make a positive impact for the people and communities that you serve.

If you are a charity or charity trustee and are seeing signs of financial distress, you can contact our expert team here