Empty handed
1 Feb 10
The demand for charities’ services may be increasing, but income is dropping. They will need to look at new ways of making and saving money if they want to survive in the new economic landscape
by Robert Outram
The Moffat Charitable Trust has, for more than ten years, funded a range of youth, community, sport and arts projects across Scotland. But its programme of good works has now come to a halt. The trust’s website warns: “Please note that the Moffat Charitable Trust is unable to commit to any new projects at present.”
A large proportion of the trust’s investments took the form of Royal Bank of Scotland equity. The bank’s troubles and collapse in share price have hit both the value of, and income from, the trust’s portfolio. So, while the trust is aiming to maintain its existing commitments, it is effectively closed to new business.
This is one example, albeit an extreme one, of the pressures the charity sector throughout the UK is facing during the recession. Investment income for charities and charitable trusts is down, and the problems of the Lloyds TSB Foundation have been widely reported. Corporate giving and, to an extent, individual giving have been affected; and public sector funding is increasingly tight. Meanwhile, the demands on many charities are actually increasing.
As Lynne Lamont, head of charities, Scotland with investment managers Brewin Dolphin, explains: “Most charitable funds are run for the long term, so the emphasis is on income, and on maintaining the real value of the capital and generating a healthy and growing income through time. Low interest rates mean charities’ cash holdings have been suffering. Also, many Scottish charities had large sums invested in bank equities, which have traditionally provided a good dividend income.
Lamont adds: “Now, charity funds tend to focus on investments such as government gilts and defensive stocks such as Vodafone, Unilever and Glaxo, as well as overseas equities to diversify the portfolio.”
In fact, as a survey published in December 2009 by Baker Tilly shows, Britain’s charities have – so far – proved fairly resilient during the downturn. Half of those responding said they had not seen a drop in their total income, and a further 31 per cent had seen a fall of less than 10 per cent.
Within the overall picture, however, there are causes for concern. Government funding is the biggest income source across the whole of the voluntary sector and it is already becoming restricted. More than a third of respondents in the survey said they had seen a reduction in public sector finding, and two-thirds expected to see further cuts over the next 12 months.
More than nine out of 10 had seen a fall in investment income and 39 per cent had seen corporate giving decline.
Janet Hamblin, head of charities in Scotland with Baker Tilly, says: “Charities have had to become more efficient, but they are also having to become more inventive. They are now more open about being ‘commercial’. And funders do not want to support a charity that cannot use the money well.”
She adds: “There are still too many small charities that all have to fund their own human resources, IT and so on. If you could get a shared services mechanism that works, it would help.”
One example Hamblin cites is the merger of two Aberdeen-based housing associations, Grampian and Langstane. The bodies have retained their separate identities and philosophies as associations, but under a single holding company providing shared services and administration.
Primrose Scott, a CA and former ICAS president, is dealing with her own merger issues, as treasurer of Age Concern Scotland. Age Concern and Help the Aged are merging to form a new organisation later this spring as Age UK (and Age Scotland, north of the border).
Scott says: “Both bodies share the same goals. There will be economies of scale, but that was not the main driver. As one body we have a more powerful voice.”
Merging the brand was one thing, but the move also required bringing two sets of systems together. One of OSCR’s requirements was that money raised in Scotland could be shown to be used in Scotland, which presented a further challenge for the two systems, especially as Age Concern Scotland operated as a discrete entity, while Help the Aged was organised on a UK-wide basis.
Scott adds: “Fundraising over the past year with trusts, corporates and individuals has been very difficult. However, there has been an increase in legacies, which has countered the decline in other forms of income.
“There are also fewer large corporate donations, but we are continuing to build relationships. This year things will still be tough, so we are having to look at our budgeting and business plans very carefully.”
Not all contributions to good causes come in the form of cash. Pilotlight is a UK-wide organisation that brings the expertise of professionals, with time given on a voluntary basis, to help smaller charities manage their operations more effectively.
Pilotlight Scotland’s membership manager Jason Dawes says: “We have been very pleased by the number of people who have seen Pilotlight as a way to effectively manage their skills giving.”
He adds that a survey conducted in 2009 found that 84 per cent of “Pilotlighters” found the experience has helped them become happier or more fulfilled in their professional work, and 94 per cent say they have refreshed or improved their skills as a result.
Alec Carstairs is head of Ernst & Young’s Aberdeen office, but he is also a director of the Vine Trust, which runs aid and development projects in South America.
He says: “Regular donations, such as standing orders, are down but we have had a number of significant one-off gifts which has helped to offset that, so our income has been higher than for the previous year.”
Has the recession had an impact on strategy? Carstairs believes it has: “We’ve been more cautious in some decisions.”
The Vine Trust gets no government funding, but for the many UK-based charities that do, the squeeze on public spending is a real issue. Kenneth Ferguson, a CA and finance director with charity Aberlour says: “Many large charities are heavily dependent on local authority funding, which is a very difficult model just now. Budget cuts are being passed on and there is no concept of full cost recovery. Local authorities are looking for statutory services to be provided at lower than cost.”
He adds: “Councils tend not to be prepared to enter long-term contracts even though charities have long-term liabilities.”
Ferguson says charities like his are focusing on developing other sources of income, and cost control. With staffing as the main cost and strict standards set by the Care Commission, there is not a great deal of scope to reduce outgoings, however.
Ferguson says: “I would expect to see a degree of rationalisation in the sector to address the issue of fixed costs.”
So what are charities doing to stay afloat? Lesley Christie, director of fundraising with St Columba’s Hospice, says: “We have worked hard to ensure that we are ahead of last year by looking at areas where we could see opportunities for growth in terms of new markets.”
She adds: “Corporate donations and sponsorship income are down, but there are still wonderful opportunities from companies that have embraced the concept of adopting a charity for the year and involving and supporting staff in fundraising.”
Mike Crerar, managing partner and head of the charities unit with accountants Geoghegans, argues that charities can still take their fate into their own hands. He says: “The board of one charity I’ve been working with feared they might have to wind it up. Instead, they invested in recruiting a fundraiser who has been very successful.”
What about mergers and joint ventures? Crerar says: “People are talking about this, but I have not seen anyone who has done it yet. Trustees feel they are obliged to ensure their charity does not lose its identity, which can make them reluctant to contemplate a merger.”
Kenneth McDowell, an audit partner with Edinburgh-based firm Chiene + Tait and chairman of their charities group, argues: “There’s an active need for all board members to get involved in strategic thinking. Clear thinking that will drive the organisation in the right direction is key.
“Charitable law reform and recent Companies Act developments place even greater responsibilities on trustees and board directors. Consequently, regular and up-to-date information for board review on matters such as working capital is vital in the current climate.
“Also, do you have the right skills around the board to interpret what you are being given and challenge it? The composition of the board remains an issue, with an appropriate mix of board members focused on the charity’s objects and board members with professional skills.”
McDowell adds that with many grant-giving bodies now facing reduced revenue, charities need to consider other sources, such as philanthropy. He says: “I’m hearing that many wealthy individuals wish to get involved, but charities have to connect with them.”
Adrienne Airlie, senior partner with accountants Martin Aitken & Co, is also Scottish convener of the Association of Charity Independent Examiners and will be chairing the ICAS Charities Conference in May this year. She says: “Charities will have to be more hard headed and more critical about what paths they take. We are seeing more interest in strategic alliances and joint ventures even between ‘competitors’.”
Airlie’s view is that UK charities could follow the approach in the US where “full cost recovery” is built into many projects, with the cost of administration, for example, included in their estimates when they are bidding for funding. In the UK, many social care projects are charged at less than full cost.
Baker Tilly’s Janet Hamblin says that charities looking to prove their worth to funding bodies and philanthropists are increasingly using the concept of “social return on investment”. She explains: “It’s trying to quantify, for example, if I get a grant of £4m to reduce homelessness, for every 10 people I can take off the streets, what is the result in terms of reduced benefits that need to be paid out – less unemployment, better parenting because people are in stable homes and so on?
“It’s not bog standard accountancy! For example, one of my housing associations has been running a welfare session for single mums. People who were stuck in their houses have been coming along to a community centre and how do you value that?
For example, does it reduce the medical costs of dealing with depression?”
Hamblin says that working with a skills body in England, Baker Tilly was able to show that a grant of £4m had created an estimated £40m or so in social benefit.
She adds: “That’s a powerful argument when you are looking for the next £4m.”