Don’t fear the reaper – be ready for him!
The Emergency Budget of 2010 has been delivered and it promises “pain now, more pain later”. The combination of tax rises and budget cuts announced by the Chancellor will cast a long, dark shadow over the charity and not-for-profit sector.
Health charities, quite correctly, stress that being aware of a problem is the first and most important step in avoiding, or at least minimizing its impact. This “stitch in time” strategy has to be adopted when it comes to your organisation’s financial health. Getting an immediate check-up and changing your charity’s “financial lifestyle” is the only way you can be sure that your organization is fit enough to survive when “the Axeman Commeth”.
The budget threatens charities both on income and expenditure and so organisations need to be prepared. Drastic cuts to local government budgets will hit grant based funding streams, the VAT increase will suddenly see expenditure rise by 2.5%, while changes to benefit's regulations could see a surge in demand for services.
Grant Based Funding
The most pressing threat is posed to those organisations for whom grant funding is a significant part of their income. With departmental spending cut by 25% across the board (other than for protected funds) there will be significant pain.
The cuts here have already started, NCVO have launched a “Crowdsourcing” cut watch (a fabulous initiative where members list reductions to their budgets). This tells a grim tale that ranges from scaling back of services, through to redundancies ending with ceasing to trade. They list £3m worth of cuts to date. Meanwhile, they estimate that one third of the voluntary sector's income is directly at risk.
Yet these initial cuts, followed by the budget reductions, will be delivered not as a single deadly strike, rather a rain of smaller continuous blows. The potential drop in available revenue will be amplified if government departments and agencies make their external budget cuts deeper than their internal ones. The grim truth is that to survive in such a savage environment, charities will need to be running as efficiently and effectively as possible, saving money now in case the well runs dry in the future.
Organisations need to be clear in their purpose so that they can deliver on their objectives, which will remain the key to getting what little funding is still available. Allied to this is a need to be transparent: from the filing of expenses (which will build public trust), filing on time (to avoid unnecessary fines and maintain reputation) and demonstrating clear control over your financial affairs (which again make bids for grants stronger).
The VAT Rate Rise
The next threat comes from VAT rate increase to 20%, which deals charities a particularly brutal blow. There will be an instant increase in costs estimated at being between £140-£150m to the charity sector, with smaller charities being hit hardest. The Charities Tax Group calculate that “charities with incomes under £30 million a year will lose 3.6 per cent of their total income to VAT; for charities with incomes over £30 million, the proportion was 2.3 per cent” (Daily Telegraph). All of which will present itself directly on the bottom line.
So, the need to save money in advance of the rise and be in a position to minimise its impact after is imperative. Considered and strategic planning will help lessen the pain, but only if the plans are drawn up now and the solutions in place by January.
The change to the VAT rate will do more than just increase direct costs of day-to-day running of your organization. Louise Richards, director of policy and campaigns at the Institute of Fundraising, told Charity Times that the rate increase will put “more pressure on fundraisers to maintain income levels and return on investment”.
Perhaps least tangible of all is just how much the VAT rise will affect giving. An increase in general prices will directly affect how much the man in the street or on the end of the direct debit will have in their pocket.
The sensible choice therefore is to trim costs and run the organisation as efficiently as possible thus limiting outgoing VAT. Then to get access to accurate and timely financial reports that will reveal changes to costs and giving patterns as they happen, not at the end of your financial year by which point considerable damage will already have been done.
Other Tax Changes
Confusing the picture still further, is the potential impact of tax changes that could prove good, bad or just a missed opportunity for the sector. The raising of Capital Gains Tax threshold to 28% for higher rate taxpayers offers a great chance to increase giving via land, property or shares, but organisations have to be able to prove themselves able to make the most of any such gifts.
While the loss of 880,000 people from the Gift Aid pool (as a result of the personal tax threshold rise) sounds dramatic, but there is an argument to say that these people are those least able to make significant contributions (in terms of total value). Regardless, each and every charity must have accurate and speedily delivered financial reporting system in place, otherwise changes in giving patterns cannot be gauged and fundraising strategies adjusted to compensate or exploit them.
Increased Demand
The saddest effect of this budget however may well be on the users of charity services. A potential example of this can be seen in the Guardian’s story “Benefit caps will tip poor into homelessness” which examines the combination of the imminent capping of Housing Benefit and the projected 2013 additional reduction for those on long-term Jobseekers allowance. It projects that some people claiming housing benefit would lose up to 40% of their total rent and quotes Campbell Robb, of Shelter "People will be forced out of one form of accommodation, but there is nowhere for them to go to. We expect to see debt and evictions rise as a result of this". Which will increase demand for housing, debt and the advice charities – all at time when these very organisations will be feeling the financial pinch and are least able to help.
Such scenarios, where multiple cuts to different strands of governmental spending combine into a perfect storm for the more vulnerable in society can be expected to develop as the reality of this Emergency Budget sets in. The challenge, and it is a daunting one, is for charities to be able to help more, with less.
Conclusion
To extend the medical metaphor from introduction, it is imperative that organisations now use consultants to check their corporate health and take the reforming medicine the prescribe – no matter how unpalatable it seems.
Consultancy is often viewed as an indulgence to be enjoyed in times of plenty. The exact opposite is actually true, consultants provide specific expertise and analytic perspective that in post staff cannot hope to provide. They offer a compassionate but clinical insight via processes such as Business Process Reviews, Strategic Financial Plans or Efficiency & Effective reviews. Such diagnosis will ensure that all possible savings are identified and mechanisms put in place to enable a robust response to changing patterns of income or expenditure.
Outsourcing is a practical and sensible process that must be considered. It may appear complicated and a little commercial but it addresses the key issues head on. While it may be an uncomfortable process, it could save your organisation’s financial life by bringing immediate and direct savings into play.
There are also less obvious benefits to outsourcing your finance function. When everything is in a state of flux it offers rapidly scalable solution that can be instantly expanded (hopefully) or contracted to reflect changes to funding streams or other income. It also brings effective reporting into play. Charity Business reporting systems offer overall departmental breakdowns; grant reporting, balance sheets, profit/loss statements, aged debtors & creditors and trial balance reports. These are produced monthly so you have time to react. If the precise benefits of such reports are instantly obvious ask someone from your finance team. And while you’re at it ask them why you don’t get these currently! Because, only when you are armed with such information will you know if your charity is fit, fine or failing. As another health campaign once said, don’t let your organisation die of ignorance.
