The not-for-profit sector in the UK is sizeable, contributing a net £18bn or so per year to GDP.
Its growth rate tends to mirror that of the economy as a whole. But in the last decade, its average growth rate of 2.3% outstripped the 1% delivered by the wider economy.
It is a sector that tends to be resilient during downturns, bouncing back quickly as the economy recovers. But this is no ordinary recession, and the sector may not rebound as speedily this time. A forecast of zero growth over five years would therefore seem likely, although recovery is anticipated from 2024 onwards.
Digital transformation
Looking at the issues facing the not-for-profit sector at the moment, we can see a lot of similarities with those faced by other businesses. Much of the sector’s work involves donations and fundraising, which requires engagement with its customer base. Before the pandemic, it relied on holding big events and on face-to-face interaction, but now much of this engagement will have to be done digitally. In other words, the future of its events will be more virtual than actual. But in some ways, that’s a good thing because it means that that organisations in this sector avoid costs associated with traditional events, such as venue hire and insurance. However, it does mean that they need to invest in the digital side of their business.
Some of the larger organisations within the sector are in a much better position to make that necessary move online. There are many examples over the last few months where charities have adapted quickly and successfully, with online events such as Cycle 300 for Cancer Research and Maggie’s Run 50 Facebook Challenge.
A drop in income
Many charities have shops and have relied on footfall. So, when the high street suffers, they suffer as well. The issue is how to transform their organisation into an accessible business, now that people are unable to visit in person. A few have already created online versions of their local store, but that can be quite a challenge for some, as they tend not to have the experience or resources that big retailers have.
As well as losing share of disposable income from individual customers, some charities may also suffer from loss of corporate donations, due to the economic impact of the pandemic.
More positively, charities may now have more volunteers, as some people now find it easier to donate time than money. But this means the organisations need to ensure they make the most effective use of their volunteers’ time.
Consolidation
When not-for-profit organisations face financial challenges, consolidation is often the best solution. Charities tend to partner up with other charities to survive. For instance, several small charities which all have a common purpose, such as mental health or certain disabilities, might merge. Or where a smaller charity is struggling, it might be absorbed into a bigger charity focusing on a similar area. It means the good work of the smaller entity continues to be done, but perhaps in a slightly different way.
In the mid-to-lower end of the market, charities are often run by volunteers, so this is not their day job. They are involved because they’re passionate about the cause and often because it has personal meaning for them. This means it can be very difficult for them to find a solution if the charity runs into financial difficulty. In these circumstances, the answer is probably to merge with a bigger organisation.
The duties of trustees
Many organisations in the not-for-profit sector have trustees, whose roles and responsibilities are similar to those of a statutory director in a profit-making business. But unfortunately, trustees are not always aware of this or familiar with the duties that go with the role. They are responsible for ensuring that the organisation can continue to function, in terms of debts, and responsibilities to creditors and liabilities. So, it is vital that they take a keen interest in the general financial management of the organisation, including keeping a close eye on its cash position and forecasting.
However, often trustees take on the role because the cause is close to their heart or because they can contribute useful technical support or knowledge. Or in some cases, a trustee might be a celebrity or ‘influencer’. But they are still responsible for running the organisation effectively. That’s part of their role and function.
While the people in this sector tend to be very passionate about the cause they are working for, that does not always go hand in hand with having the necessary financial expertise to fulfil the role of trustee.
The importance of taking early advice
Trustees also have responsibility for money on a day-to-day basis. This can include income from a shop, fundraising income and donations, for instance where people leave the charity money in their will. Managing this effectively can be very challenging for some trustees. So, it is key that they take early advice on this aspect of their role, as well as on their other financial duties and responsibilities.
If there is not a sufficient level of financial expertise within the group of trustees, they might need some external support to fulfil their function. This lack of financial expertise does not, of course, mean that they can’t be a trustee, but it’s important to be aware that there might be a gap in their knowledge and to seek advice.
Often the financial-management responsibilities that come with being a trustee are not part of the trustee’s skillset. Their expertise is likely to be aligned to what the organisation does or what it’s trying to achieve. For example, a trustee such as the headmaster of a school is an educator. They’re not a managing director of a business, so it is unlikely they would be experts in cash flow, P&Ls and balance sheets.
So, when trustees take on that role, they may not appreciate that in the eyes of the law and the Charities Act, and for regulatory purposes, they’re expected to have a certain level of financial knowledge. But a good external adviser can help them with that.
Building financial fortitude: more support for advisers and businesses For more information, insight and support on the key issues businesses and professional advisers are facing please go to our Building financial fortitude hub at www.quantuma.com/fortitude. There you will find a series of video interviews, articles, and further support from experts across our firm.
This article constitutes general advice and should not be acted upon without taking specific advice. Neither the authors nor Quantuma Advisory Limited accept responsibility for any actions based upon this general advice.
