It is difficult to predict the financial or operational implications of the outbreak of COVID-19 on the UK Economy or the organisations which operate within it. According to the World Economic Forum, its economic impact is already more severe than SARS (estimated global economic impact of $50 billion) or MERS (estimated global economic impact of $8.5 billion). Evidence from other countries where there has been a significant outbreak suggests a slowdown in economic activity either as a result of governmental response to the epidemic (e.g. quarantine) or arising from changes in individual behaviours (e.g. fall in consumer confidence). For the Chancellor, ready to deliver his first budget, this is one more factor in addition to the uncertainties arising from Brexit.
The impact on charities will very much depend on the specific sectors in which they operate and therefore their activities as well as how their income is raised. For example, a cultural charity may be impacted by a drop in visitor numbers, whereas a care charity may be mostly impacted by its unavailable workforce.
The reality is that we do not know what the reality will be. It is therefore imperative to be as prepared as possible and think carefully of the implications of different scenarios and to factor these into future planning. Boards and management need to recognise that it is not business as usual and there are new challenges that require specific attention. Most charities will have a disaster recovery or business continuity plans. This is a good starting point for considering what factors need to be taken into account but most of these plans focus on dealing with the impact of significant one-off events, such as inability to work from an organisation’s main office, rather than the challenges presented by an epidemic which will be much broader and deeper.
In the medium term, charities will need to revisit their strategies to ensure that these are still ’fit for purpose’ and achievable in light of the impact of the current uncertainties on their finances. In the first instance, scenario planning and decision trees are important tools which can be employed. Care needs to be taken that the focus is on shorter financial planning cycles given that it is unreasonable to make accurate assumptions about the future.
Scenario planning is seen as an important tool in helping organisations cope with the uncertain environment. The exercise requires placing values and analysis on different scenarios and this does require some out of the box thinking. Scenario planning will enable Boards and Management to gain perspective on critical issues facing the charity and make decisions about capital investments and budgeting. It will also enable the organisation to identify those events that will create substantial negative impacts for the charity allowing consideration of appropriate contingencies in the budgeting. Care needs to be taken that the scenarios are not treated as forecasts and the range of scenarios is not simplistic – for example optimistic and pessimistic and that the scenarios aren’t unconsciously biased to thinking to what we know and wrongly thinking that the future will resemble the past or to extrapolate on the basis of what is happening now. Good scenario planning requires many perspectives and this involves engaging with a diverse team across functions in the charity. It should also include external perspectives to identify threats and opportunities that may have been overlooked.
Decision trees are also helpful so that managers and Boards can structure and consider the sequencing of their decisions.
Consideration of linked risks and the 'domino’ effect or risk ’cascades’ should be made. Most major value losses involve the interaction of more than one risk. Similarly, exposure to a portfolio of risks needs to be considered. An isolated concentration on value at risk could result in not spotting ‘risk contagion’ – where one low impact risk leads to another and another so that the cumulative impact is catastrophic.
Organisations that will survive will be those led by individuals with the right knowledge, skill, and experience to act decisively when the time is right. It will be important to identify those who hold pivotal roles in your charity and ensure they regularly meet to share their knowledge. Providing an opportunity to discuss and deliberate issues and challenges, make decisions and to then act together to successfully communicate and implement those decisions.
Charities must be ready to make decisions within shorter time scales. The two-tier structure of Trustees and Executive can promote sub-optimal decisions made on a consensus. There may be an elongated path to decision making which can cause delay to the charity’s immediate challenges and opportunities. Therefore, there should be a re-evaluation of the charity’s decision-making protocols, in particular, factoring in that some key decision-makers may themselves be unavailable for periods of time in which it is critical to making timely decisions.
There will also be a need for continuous horizon scanning and the sharing of information between the senior management team and Trustees.
There is a need to monitor and track the key indicators that give early warning of the imminence of a particular scenario. These indicators should be seen as signs of potentially significant change and need to be selected and monitored with great care. Each organisation may well have very different choices of indicators - for example, those with significant earned income need to consider the impact of a slowing or stagnant economy whereas those in service provision will need to consider resourcing challenges as a result of staff absenteeism. Action plans for different scenarios should be developed and trigger points should be set and monitored. There may be a need to divert resources from carrying out peripheral activities to core or essential activities.
As income levels are threatened and additional costs arise, cash flow and reserves management inevitably demand more attention. The uncertainty and volatility of income may dramatically increase the exposure to liquidity risk, as will additional cost impact of changing operational models. Charities with low liquidity will be the ones most likely to be significantly impacted. The issue is how is the reduction in reserves is going to be managed. Are funds going to be obtained by borrowing, selling investments or drawing down on cash balances? Some charities may need to dip into reserves to manage cash requirements.
Below is a list of some of the areas charities may need to consider in their scenario planning, budgeting, forecasting and risk registers.
Â« Back to all blog posts
- Fall in financial markets will mean a fall in investment income impacting resources available for grant-making trusts and foundations and those holding investments. Charities with 31 March year ends with upcoming triannual valuations may find their pension scheme’s deficits rising.
- There may be a fall in income for charities with trading income arising from retail or visitor attractions or other types of earned income as a result of a reduction in economic activity.
- Charities generating income from voluntary sources such as donations, fundraising or sponsorships may see a fall in their income as large events are cancelled or as individuals have less disposable income (as a result of falling investment rates or inability to work and the general shrinking of the economy) to donate.
- Charities need to consider the financial and reputational implications of any contractual obligations. These include cancellation of events at visitor attractions or entertainment venues or other events such as participation in the marathons or fun runs or fundraising challenges.
- There may be a rise in demand for services provided by charities as there will be more need or less ability by other providers to help those in need. There is some evidence that the elderly may be disproportionately impacted by COVID-19 so may require more help for example with their shopping if they are unable to leave home or are unable to look after themselves during a period of illness or recovery.
- There may be disruptions arising from supply chains have been interrupted not least because China has effectively been in economic lockdown since the Chinese New Year.
- The UK government’s latest plans indicate that up to a fifth of the UK workforce could be off sick at the peak of a coronavirus epidemic. This will lead to an increase in absenteeism arising from self-isolation or sickness impacting delivery of services and operational plans. Charities must consider resourcing and how activities can be delivered in the event that there is a large number of employees unavailable for work. There may also be additional costs as existing employees are paid and temporary staff is engaged to continue operations. There also needs to be consideration of delegation of authorities and purchase and payment authorisations in the event that key individuals are unavailable for work.
- Some charities have started to implement remote working policies and suspend or limit large gatherings or meetings. This is to help protect staff and ensure continuity of operations. Some have started to reduce/eliminate non-essential meetings to allow key management and staff to focus on dealing with the crisis and ensure continuity of services. Constitutions should be reviewed to check if remote participation is allowed for board meetings or AGMs.
- Some international charities have started a ‘business critical’ only travel policy for their staff. Whilst in the short term the impact is likely to be insignificant, in the longer term there may be consequences for delivery or monitoring of overseas programmes.
- Charities with on-going capital programmes may face disruptions as a result of third parties inability to deliver on time. The consequences of this may be an additional expenditure, use of contingencies or late completion which may impact future income or operational activities.
- Some charities rely on volunteers either to carry out operational activity or fundraise. It may be that these individuals will be unavailable or unwilling to help in the event of an epidemic especially if they are elderly themselves and therefore at most risk of serious illness from COVID-19.
- Safeguarding and health and safety issues need to be considered as the disease unfolds and charities need to ensure that decisions are made to correct safeguard their employees, volunteers and those they work with. Schools have been particularly vigilant from the outset in issuing regular communications setting out their policies on self-isolation for parents and pupils travelling to higher risk countries and areas. Charities will need to ensure that they consider the day to day needs as well as different ways of working to protect employees in the event of a major outbreak in the UK.
- There should be a continued focus on ensuring adherence to GDPR rules especially as there may be increased sharing of personal information on employees health or even personal travel arrangements.
- There may be an impact on cashflows/liquidity resulting from all the factors noted above. Charities with banking covenants or tight liquidity will need to be especially vigilant, monitoring cashflows and forecasting differing scenarios frequently and discuss any issues with their banks as early as possible.
- Insurance policies need to be reviewed to check what cover, if any, is provided for loss of earnings or other factors arising from what is termed as a ‘notifiable disease’ or an ‘epidemic/pandemic’ and that there are no other exclusions on making claims. There should also be discussions around when issues should be notified to insurers to enable claims to be made.