With inflation climbing to historic levels, it's vital that charities invest in forward planning to mitigate negative effects, no matter their size or position.
The current cost of living crisis is overwhelming many individuals and organisations, including those who may have previously been unconcerned. So what does this mean for charities, and what should you do?
The fiscal thinktank, Pro Bono Economics (PBE) has put together a guide for charities trying to tackle the impact of rising inflation and understand its biggest impacts on charities specifically. The main three areas that will be hardest hit for charities include rising costs, depreciating income, and the impact on beneficiaries finances.
Expenditure is inevitably going to increase, and to ensure that staff are not worse off, charities would need to increase wages by 8.8% from 2021. For an organisation with an annual expenditure of £1M, this would translate to an additional £32,600 spent on wages in 2024, to counter the impact of inflation.
This will likely sound extremely daunting for many charities, who may already be struggling to meet wage expectations. The Living Wage Foundation found that 17% of third sector professionals were earning less than the real Living Wage, and this rose to 29% for all part time workers, the majority of whom are women.
Salaries that fail to keep up with inflation will inevitably drive up skills shortages as employers risk losing staff, and shouldering higher recruitment costs to replace them. Not only is it less cost-effective to replace staff rather than spend more to retain them, but Charity Job has also reported a decrease in the number of applications per vacancy since the start of the pandemic. In the context of a candidate-led recruitment landscape, it's important for charities to consider wage negotiations as soon as possible, whilst realising that many staff may already be struggling.
As the cost of living rises, the capacity for donors to maintain donations - and subsequently for charities to maintain income levels - is at serious risk.
Many donations are anchored, either through direct debits, or by a specific amount that individuals have in mind to donate. Inflation is unlikely to change this amount, so in real terms, donations will be worth less.
The most common gift amount of £20 would depreciate to a worth of £17.60 by 2026. This is important for charities to consider and initiate discussions around expected costs of services and impact of inflation on donor behaviour.
This also affects grants; a grant of £100,000 awarded to an organisation in 2021 would be worth £94,000 in 2023. Taking this into account when applying for grants and considering financial decisions will therefore be vital.
As the third sector is a net saver, not a borrower, ensuring your money is working hard for your charity will be increasingly important. This may involve discussions around investment strategies for those with reserves, particularly as interest rates remain low. Charities nearing or below their reserves policy must put serious consideration into this.
Finally, the pressure on charities through an increase in service users is highly likely. With household budgets seriously stretched, many more people will find themselves living below the poverty line and in need of assistance.
With the average monthly food shop increasing by £15 in December 2021 alone, food banks will naturally be one charitable service experiencing overwhelming increases in demand.
Any charity that provides services to those on low incomes will inevitably be put under increased pressure, as well as charities that rely on ticket purchases and visits, such as cultural charities with museums and theatres.
As the cost of living pushes many to cut back on non-essential expenditure, these charities will see a decrease in footfall, undermining their income streams.
So what can charities do now to plan ahead and mitigate the risks?
The three key messages endorsed by the PBE are...
Determine if the demand for their services is likely to change and plan for it.
Enter wage negotiations early and appreciate many are likely to be struggling.
Revise income targets and plan how to deliver them in the context of inflation.
In order to best tackle these, it is important to keep up to date with current trends and have the best possible understanding.
You can keep an eye on the current economic climate in relation to the third sector on PBE's news page here.
If you have any related concerns or ideas that you'd like to share with us, or anything we may be able to help your organisation with, please do let us know by emailing contact@3sg.org.uk
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