Charities: Counting the cost of cuts
With deep and wide reductions in funding and increased demand for their services, how are charities staying afloat? Robert Outram finds out.
Last November, Hollywood A-lister George Clooney brought a touch of Hollywood glamour to an Edinburgh sandwich shop, when he visited Social Bite (pictured above). It's no ordinary café, however, but a 'social enterprise' with 100 per cent of its profits going to good causes and one in four of its staff is homeless.
For social enterprises like Social Bite and for more conventional charitable organisations, the business of surviving in hard times is somewhat less glamorous.
An ICAS survey of CAs in the sector, Charity Horizons, found that the most pressing issues for most charities are financial in nature. Mark Gallacher CA, a partner with EQ Accountants specialising in the not-for profit sector, said: "Many charities are local authority funded, and have seen grants frozen or reduced. For many the amount raised by individual donations has also reduced in recent years."
Alan Cunningham CA, a partner with Alexander Sloan, said: "Is it a tougher environment for charities? Absolutely. It's tougher for them now than it was in 2008. The cuts have got deeper and wider.
It's going to get more challenging as demand for their services increases, especially for those charities providing social care, inclusion and community related services under a local government contract.
"For many of the smaller charities the issue is whether they are a going concern - will we be here in a year's time? Some of those dependent on local authority funding have been told to expect 15-20 per cent cuts in funding, on top of severe trimming that has already taken place."
He also pointed out that charities dependent on investment income are also finding that low-risk investments are providing very limited returns.
Adrienne Airlie CA, Chief Executive, Martin Aitken & Co and convener of the ICAS Charities Committee, warned: "It's going to get more challenging as demand for their services increases, especially for those charities providing social care, inclusion and community related services under a local government contract. It can be expected that these charities will be increasingly asked to do more for less in the next couple of years.
"A number of charities will be taking a long hard look at the numbers in some of these contracts, as it is becoming, if not already is for some, increasingly difficult to square the funding versus demand equation."
Increased costs of running charities
As well as squeezed income, many charities are facing increased costs, especially employment costs. For example, while most charities support the National Living Wage in principle, for many it will add to payroll costs.
Pensions also represent a major issue for many charities, as Gillian Donald CA, Head of Charities with Scott-Moncrieff, explained: "Auto-enrolment will mean a big increase in payroll bills. There is also a huge problem with final salary pension schemes. Some charities are with a local authority pension scheme and some are with what is now the Pensions Trust. Charities generally can't afford to get out of these schemes because of the exit charge, but they can't afford to stay in them either."
Kenneth Ferguson CA is a member of the ICAS Charities Committee and Director of The Robertson Trust, Scotland's largest charitable provider of grants. The Trust is fortunate in that it is an independent grant-making charity, but he is well aware of the pressures that are faced by the many other charities that the Trust supports.
Kenneth explained that, in the past, when services and staff were transferred to charities from the public sector, in many cases they retained their terms and conditions (T&Cs), including pension liabilities, which their new employers inherited.
Longer lifespans and reduced investment income mean that in many cases these pension schemes require additional funding from the employers. The next set of triennial valuations are likely to reveal this as a serious funding shortfall. Kenneth added that when the reporting standard FRS 102 applies to charities, this liability will have to be shown on the balance sheet, which could mean a big reduction in available capital.
There are fears that, in some cases, a charity's final salary pension scheme could kill it.
The pensions issue is a key one for Ken Hay, Chief Executive of the Centre for the Moving Image, which manages the Edinburgh Film Festival, the Filmhouse independent cinema in Edinburgh and Belmont Filmhouse, Aberdeen, as well as leading talent development and educational initiatives in Scottish film.
Ken said: "Staff that had moved across under TUPE retained their local government T&Cs. Funding the legacy pensions, including for former employees, takes a lot of money. There are now only four active members of the scheme - we closed it to new staff a few years ago - but if we exit the scheme, the cessation liability would be significant."
Ken explained that the Lothian Pension Fund is one of the first to actively address the issue of legacy schemes, and an employers' forum has been set up for the organisations affected in the Lothian area. Ultimately, either the liability will have to be funded - by the local authority or some other authority, such as the Scottish Government - or written off, or some charities will have liabilities they are not able to meet.
The Charity Horizons survey also finds, however, that charities are actively addressing their most pressing issues. Of those responding, 80 per cent said they were identifying measures to tackle their "top three" short-term challenges, and 70 per cent said they had plans to address their medium-term challenges.
Developing a commercial approach
Adrienne Airlie said: "The smart charities are developing a very focused, commercial approach - identifying what they do really well and then just doing that - and they are moving out of areas where the numbers don't add up for them anymore. We're also seeing more collaboration and partnership working among charities."
Douglas Parkhill CA is Director of Finance and Resources with Missing People, a UK-wide charity based in Richmond, West London, that aims to provide a 'lifeline' to the 250,000 people who go missing every year.
He said: "It's a challenging environment but we are facing it well prepared and we have planned ahead. Standard sources of funding have declined; we have been growing our trust income, and looking to grow corporate support, for example, the People's Postcode Lottery is a big supporter."
You have to be very professional in your fundraising. The quality of your bidding is crucial and you need to focus on reporting outcomes.
Sharing the risk of a new venture helps with a large-scale project. The Child Rescue Alert is a text-based system that sends out an alert when a child is abducted or is otherwise believed to be at serious risk. To launch it, Missing People worked with funding and expertise from, among others, the National Crime Agency, Royal Mail and Groupcall, a comms business co-founded by Bob Geldof KBE, which provided software and a subscription website.
Douglas added that the charity is also growing its commissioned income, that is income from providing services rather than grant income. He said: "For example, we carry out ‘return home' interviews with children who have gone missing but return, on behalf of local authorities."
Missing People has also applied successfully for European Union grants. Douglas stressed: "You have to be very professional in your fundraising. The quality of your bidding is crucial and you need to focus on reporting outcomes."
Leveraging additional funding
Gillian Donald said that charities can find their hand is stronger than they feared, when dealing with commissioning authorities. Gillian argued: "Charities are set up because they can do some things better than a local authority, and the charity can often leverage additional funding not available to the local authority.
"If the charity has a good relationship with its council contacts, they should treat it as a negotiation, not a handout."
Ken Hay said the Centre for the Moving Image has been forced to "think outside the box and explore all the options".
The Centre's funding comes from diverse sources including trading income from cinema tickets, food and drink, and sponsorship. While a spread of grant funders spreads the risk that one funder may reduce its funding, it also means more complexity because different funders want different outcomes, and require different reporting.
Ken noted, also, that commercial sponsors tend to be increasingly prescriptive, and delivering to their requirements can take up the bulk of the sponsorship income. Typically the net benefit to the charity is the margin, rather than the sponsorship headline figure.
Social impact bonds (SIBs)
EQ's Mark Gallacher said one example of 'thinking outside the box' is to look at social impact bonds. This is an innovative form of funding by results (see below) with loan finance put up by private sector investors. Mark said one of his clients has explored this route, with help from Social Investment Scotland - a not-for-profit body set up by the banking sector - although it is not suitable for all types of charity or project. Gallacher stressed: "The charity needs to be able to generate a cash flow, for example by providing a service for a local authority."
What are social impact bonds?
Introduced in the UK in 2010, are designed to link the funding of public services to outcomes. SIBs involve a three-way relationship between investors, commissioning bodies (typically local or central government) and charities delivering services.
Investors pay for the project at the start, and then receive payments based on the results achieved by the project, as well as enjoying tax relief that can be offset against their other income
The financial risk of the project not delivering is borne by the investor ‚Äì who will receive a return commensurate with that risk - rather than by the commissioning body. SIBs are suitable for funding some types of charitable services but not for others, so careful analysis needs to be undertaken before going down this route.
Gillian Donald agreed that SIBs can be an option for some charities but noted that charities tend to be risk-averse when it comes to borrowing, not least because trustees often - unlike company directors - face potentially unlimited liability.
Being a charity trustee is an honour and a public service which many finance professionals are glad to take on. It's important to be aware of the potential downside, however.
Kids Company was an award-winning charity set up to help troubled young people in the inner cities. Its charismatic founder, Camila Batmanghelidjh, was a mover and shaker in political and business circles, and its chairman was senior BBC executive Alan Yentob. The charity ran into allegations of financial and other mismanagement, however, and with crucial grant funding withdrawn it was put into liquidation in August 2015.
The controversial demise of Kids Company was unusual in the charity sector, but it illustrates the reputational and other risks charity trustees take on.
Those pressures exist even when the charity's going concern status is not at issue. MP Tasmina Ahmed-Sheikh, the founder and former chair of the Scottish Asian Women's Association (SAWA), recently came under the spotlight when an investigation by The Herald newspaper found that during her tenure, SAWA had spent only 2.8 per cent of its income on good causes. She denies any wrongdoing and points out that since she resigned to become an MP the charity has gone on to fund more community activities .
More generally, a committee of MPs last month criticised the charity sector for resorting to unacceptable 'hard sell' fundraising techniques.
Financial challenges for charities
Gavin McEwan, a charity law partner with Turcan Connell, advised: "There is no question that financial challenges are high on charities' agendas... in many cases, governance failings have contributed to the degree of financial challenge.
"That is not to say every charity which faces financial difficulties is poorly managed - far from it - but charities which do not have good governance practices can quickly find financial problems worsen. Charity trustees need to be fully engaged with their legal duties and must be willing and able to exercise critical challenge of their senior management team when necessary."
He added: "Inquiry reports published by the Charity Commission and the Office of the Scottish Charity Regulator (OSCR) on previous investigations are a good source of guidance on what an effective charity trustee should and should not be doing."
Alexis Graham, partner in the private client and charities practice with Maclay Murray & Spens LLP, suggested that would-be trustees ensure they have a good induction pack including the charity's accounts, constitution and objectives.
Being a trustee of a charity is not necessarily an onerous task, provided you receive appropriate advice
"it is extremely important to understand the structure of the organisation, its systems of governance, and the duties expected of trustees."
Potential trustees in Scotland should also be aware that OSCR has proposed that charities publish details of their trustees online, although it is as yet unclear whether this will be implemented.
Some charities are set up with limited liability. For example, recently created charities in Scotland are likely to be Scottish Charitable Incorporated Organisations (SCIOs). Many are not, though, and, as Alexis explained, charity trustees are subject to a duty of care and diligence "that it is reasonable to expect of a person who is managing the affairs of another person".
Vulnerable position for trustees
Adrienne Airlie advised: "A trustee's position can be a vulnerable one if that individual does not have a sense of the real drivers in the charity. There is also an underlying expectation that a CA will have a grasp and full understanding of charity accounting, reporting and regulation from day one. My advice would be to manage the other trustees' and board members' expectations carefully in the early days following appointment."
She also stressed the need to understand the charity's liquidity situation, especially as they may have funds that are restricted for certain purposes, so 'money in the bank' does not mean it is available for payroll and other general expenses.
Christine Scott, Assistant Director, Charities and Pensions with ICAS, said in conclusion: "Undoubtedly charities across the UK will continue to face significant challenges in terms of their finances and in ensuring they have the necessary infrastructure and skills to deliver their charitable purposes.
"However, the results of the Charity Horizons survey show there are many reasons to be positive about the future role of the sector in providing support to local communities and individuals and in delivering public services."