Blog

Financial sustainability Governance, regulation and compliance

26 September 2017, 17:07

Where are the ‘automatic stabilisers’ for charities income?

This blog post is prompted by the Association of Charitable Foundation’s (ACF) latest Giving Trends research, which is a must-read for everyone in the charity sector. The news is ...

Post byAndrew O'Brien

Where next?

Events »

Tuesday, 8 October 2019
Social Care Conference 2019 More »

News »

Wednesday, 19 June 2019
BEIS Independent Review of the Financial Reporting Council More »

This blog post is prompted by the Association of Charitable Foundation’s (ACF) latest Giving Trends research, which is a must-read for everyone in the charity sector. The news is very positive overall. Rising asset values has supported a very strong growth in investment income. Grants to charities have increased by over 12% according to the report. At a time when government grants are like gold dust (or maybe platinum dust, given their rarity?) the fact that foundations are stepping up and doing more must be welcomed. I also want to highlight the 70 foundations in this report, who saw their income fall but spent more on grants. Often there is a view that foundations are ultra-conservative, and ignore the wider needs of the sector and beneficiaries in terms of spending. However as this report shows, many foundations are recognising the urgent needs out there and responding as best they can. ACF has often spoken about the ‘ecology of funding’. Not every pound is worth the same. A pound of unrestricted grant funding is worth a lot more in the current context than a pound of payment by results funding, because of the flexibility it gives charities to adapt and respond. This makes foundations even more important. You can check out the Grants for Good campaign’s website to find out more about why grants are vital and why government should deploy grants more. But as this report highlights, the stepping up of foundations has been built on wider economic growth, particularly in the stock market. But what do we do if there is a down turn, what happens then?

Cyclical versus counter-cyclical funding

We can broadly put charity sector funding into two forms: cyclical and counter-cyclical funding. Cyclical funding is funding that grows when the economy performs well. Investment income is clearly one of those. Corporate donations is another. So is trading between charities, which took a hit in the post-recession years according to the NCVO-led Financial Sustainability Review. I’d also stick general fundraising income into this mix although the situation is slightly more complicated here. Although fundraising income doesn’t fall during downturns, it doesn’t appear to grow either, so it isn’t much good at replenishing the pot for most charities in the event of other sources of funding drying up. But thanks to the generosity of the British public, it isn’t something extra to worry about – although increased fundraising competition may change this in future years. Counter-cyclical funding is funding that grows when the economy isn’t growing strongly. It may sound odd but some funding sources improve when the economy doesn’t do so well. Evidence seems to suggest that charity shops, for example, is one of those revenue sources. As household finances are squeezed, people look to make their money stretch further and charity shops are one way to do that. These counter-cyclical funding sources are critical to the sector in two ways. Firstly, it helps to balance financial risk. It looks like we are heading towards even more volatility given Brexit. Charities should always be thinking about the balance of funding streams between good times and bad times. This isn’t just about reserves although reserves are an important part of the equation. Changes to your business model can be just as vital as putting money aside for a rainy day. Ideally, we want to be cultivating income streams that can stand up to economic storms. Secondly, it is often the case that beneficiaries are most in need when the economy takes a turn for the worst. This means that rather than operating ‘business as usual’, organisations will see a spike in demand. Our Managing in the Downturn surveys with PwC and Institute of Fundraising, following the recession, documented that rising demand over the years following the Great Recession.

Government income: the unknown

As was highlighted during the discussion of the ACF report today, foundations are increasingly being asked to backfill the work that government traditionally funded. Government income is the biggest unknown when it comes to funding streams because it is down to political choices. During 2008-10, the then Labour government took a very Keynesian approach and pushed money out the door quite rapidly. Charities benefited from a number of the temporary schemes that the government created. In 2010, the then Coalition Government decided to cut spending and reduce the deficit, particularly to local government and this saw a squeeze on many charity incomes – especially smaller organisations. Although governments in times of economic distress are often under pressure to cut their spending, often markets flock to government debt because it is considered safer than corporate debt. In macroeconomics, the talk often focuses on ‘automatic stabilisers’ such as social security spending, which when the economy heads downwards kick in to ensure that we don’t spiral into a depression. ACF’s report has prompted me to think: how do we build up ‘automatic stabilisers’ for our sector? Given the government’s stepping back from supporting the sector, particularly with grants, is the role of government as a stabiliser dead and buried? Or is now the time for a discussion between the government and the sector on what we do in the event of the next downturn? This is particular important for beneficiaries, who are likely to turn to our sector as they did following the last recession. It is now generally agreed that we are closer to the next recession than we are away from the last one. The ACF report is an important reminder of the positive impact that foundations have – but they can’t do everything. Although it is tempting to decry this as looking for clouds in the midst of blue sky, I would argue it isn’t a bad idea to start thinking now about where we can find our financial umbrella ahead of the next downpour. PS. I have put together an Economic volatility matrix which helps to map out different income streams and your charity in terms of different funding streams. Obviously every charity is different. Some investment strategies may be geared towards assets that perform well in economic downturns. Others may have fundraising streams which perform better because of a strong emotional connection to the cause. This is just to help board discussion and illustrate the issue.

« Back to all blog posts

Blog

Where are the ‘automatic stabilisers’ for charities income?

Cyclical versus counter-cyclical funding

Government income: the unknown

Related Content

Five takeaways from August’s Inflation Report

Finance Focus May 2018

6 simple steps your charity can take to help protect themselves from fundraising fraud

NCVO Almanac points to fundamental shifts in the charity operating environment

Better partnerships needed between finance and fundraising teams

IFS 2017 Green Budget – the good, the bad, and the worrying?

Tony Armstrong looks at Devolution: working with local organisations to transform public services

Devolution is our chance to advocate for the most vulnerable

How will the 'devolution revolution' be financed?

Caron asks: 'Why does the voluntary sector need a devolution summit?'

Do charities need to become social enterprises to survive?

EU Referendum: Keep watching this space…

EU Referendum: What could this mean for charities?

Hunting for the silver lining; the IFS, the economy and charities.

What did the Romans ever know about data protection?

Just one thing, Sir John...

The time for ‘rational optimism’ – A response to Matt Ridley

How much do we know about PbR?

Can charities help end the ‘pushmi-pullyu’ of local government spending to support prevention?

Fog of uncertainty makes post-election planning difficult for charities

Vision for sector post-2015. What did the politicians have to say at the CFG Annual Conferece?

Managing in a Downturn Report Reflections....

A change in economic outlook- is your charity sinking or swimming… tell us!

2014, politics, and charities

De-regulation for the sake of it?

Public service delivery is risky business

The lessons for Oxfam and the wider sector

Finance Focus July 2019

BEIS Independent Review of the Financial Reporting Council

CFG Annual Handbook 2019

Economic Outlook Briefing 2019/20

How the best boards do it, from preparation to meeting execution

Seeing the wood for the trees

Charity Property Matters Survey 2018

CFG responds to the Charity Commission’s consultation on the SORP-making process

What the recent SCOTUS judge controversy can teach us about the Charities’ SORP

Annual Report 2017-18: Empowering Your People

Changes to the CFG Board of Trustees

10 questions to ask before borrowing

Large Charities Focus

“Who moved the cheese?” The case for innovation in the UK charity sector

Economic Outlook Briefing 2018

Charities need to find nearly £4bn additional income by 2020 finds CFG

The key to good governance - truly understanding the business

Does your charity follow serious incident reporting guidelines?

Charity finance professionals need to be aware of new automatic disqualification rules

How big a threat is property to your charity?

Money is not the issue when it comes to charging for Charity Commission

How can charity investors perform better in a volatile market?

A stairway to heaven on business rates for the charity sector?

What do the latest Budget 2017 economic numbers mean for charities?

Live Blog: Autumn Budget 2017

Investing in financial governance is one of the most cost effective ways to help your charity

What should charities expect from the Autumn Budget 2017?

Sarah Atkinson - Have your say on the annual return for charities

New report raises concerns about complacency on financial governance

Trustee Survey Report

Time to review your risks? An update from the experts...

Autumn budget submission 2017

Government no longer has the luxury of ignoring charities

Do I need a fraud response plan?

Fraud and the 3 C's

Autumn budget submission

Three new Charity Finance Group trustees elected

Could political instability create financial instability for charities?

How can charities ensure they work towards gender equality in their organisation?

What can charities learn from the recent fraud cases?

CFG launches Counter Fraud Campaign

Record Management Toolkit Launch Roundup

What can charities learn from the international cyber attack?

Common Gift Aid Questions Answered by HMRC

Annual Report 2016-17

Essential Charity Finance for Trustees Guide

We must not see a rush to charging charities for regulation – House of Lords report

Budget Focus: Warning signs for charities in years ahead