As we come out of the pandemic and start ‘living with Covid’, what are the risks and opportunities for charities?
It would be an understatement to say that these have been a turbulent two years. We advise a diverse range of not-for-profit clients, including hundreds of charities across the South West and beyond. While Covid restrictions meant some had to pause operations, others – such as those dealing with mental health or domestic abuse - were busier than ever, struggling to meet unprecedented demands for their services.
While we could now be entering a more stable period, the sector continues to be affected by the pandemic and other world events.
In addition, charities will be adjusting to legislative changes. The Charities Act 2022 recently received Royal assent and its various new provisions will be implemented over the coming months, giving charities additional flexibilities and powers. This could prove timely in helping not-for-profits adapt and prepare for the future.
As we enter this new phase, what challenges and opportunities are facing the sector? And how can charities best take advantage of new opportunities and mitigate against risks?
Diversifying and making changes under the new Charities Act
The pandemic has forced every charity to make changes. For some, it has presented exciting diversification opportunities, while for others it’s simply been a case of adapting to survive.
As we move out of the pandemic, many of our not-for-profit clients are taking stock and working out where they want to focus in the future. Some are considering quite radical changes to their structure and objects.
The new provisions being introduced through the Charities Act should make life simpler for Trustees, enabling them to get on with running their charity and to make more decisions themselves whilst retaining a strong oversight by the Charity Commission. One significant change will be that not-for-profits will have greater powers to change their articles, particularly their objects, and update their governing documents.
Under the new Act, any changes to a charity’s objects that do not alter the substance of a charity’s purpose no longer require Charity Commission approval. More substantial changes will however still require approval from the Charity Commission.
While many charities will welcome this greater flexibility, it is important not to lose sight of the potential risks. If you are changing your charity’s activities or operations you will need to update your risk register to reflect this.
Some charities will want to alter their structure. We are advising growing numbers of our clients to convert to become charitable incorporated organisations (CIOs). This trend is likely to continue because the Charities Act will simplify the process.
Managing finances after the pandemic
The Covid pandemic significantly impacted on most charities’ finances. Sadly, many faced difficulties with fundraising as a result of events being cancelled and non-essential retail being closed. Research from the Charity Commission found that a staggering 60% of charities experienced a loss of income during the pandemic.
What is perhaps most surprising is the fact that most charities survived. The research also indicates that only 1% consider their charity at risk of closure in the coming months because of financial threats.
I have been impressed by how charities have adapted to find new income streams. Several clients have recently approached us for advice on setting up trading subsidiaries to support diversification. Engaging in commercial activity can be complex for a not-for-profit. However, with the right advice and following the Charity Commission guidance, it can be a great way of generating additional income. Over the coming months, I expect more charities to engage in this ‘out of the box’ thinking.
Another way in which the Charities Act will remove some of the administrative burdens on charities relates to restrictive funds. The new legislation gives charities more flexibility to choose how they use small amounts of income, given for a specific purpose. Charities will be allowed to use these funds for activities, as long as they are similar to their original purpose. While this is limited to specific conditions, including where the donation is £120 or under, it should reduce charities sitting on small amounts of money. This could benefit smaller charities in particular.
The war in Ukraine is impacting charities which hold investments. As we approach year end, many charities’ balance sheets will show losses as a result of the impact of the conflict on stock markets. While these losses can be explained, they will be a cause for concern for many not-for-profit organisations. Sadly, it seems likely that world events, along with the rising cost of living here in the UK, could make the coming months a challenging time financially for charities.
As charities plan ahead, I would encourage them to review their finances in line with their risk register. This will mean considering the ongoing impact of Covid, along with current and future risks, including new revenue streams and investments.
Operational challenges and opportunities
Every charity will face its own unique operational challenges and opportunities as we come out of the pandemic. There are, however, some that are likely to be relevant across the sector.
The first is the shift to hybrid or remote working. Charities were forced to move to online meetings and remote working during lockdowns. While this presented significant challenges, most have now become accustomed to this new way of working and are experiencing some of the benefits.
Many trustees’ meetings are now taking place online, which reduces costs and is more convenient. Offering hybrid or remote working means charities can access a wider talent pool, potentially attracting staff, volunteers and trustees from a much wider geographical area. The convenience of remote working, however, needs to be balanced out with the need for collaborative working. We all know that many good ideas come about as a result of casual conversations over a coffee break. Many charities are now trying to find the right mix, to enable social interaction between staff and volunteers.
However, charities are not immune to the recruitment challenges currently being felt across the board. This seems to be particularly difficult for those organisations that need staff for evening or weekend work. Like all employers, charities will have to focus on attracting and retaining the best people in a challenging recruitment market over the coming months.
Remote working presents additional risks around cybersecurity. Many charities hold sensitive data, which was previously locked away in an office, but is now accessible on staff and volunteers’ devices.
Without the infrastructure of larger organisations, smaller charities may rely on staff and volunteers using their own personal IT equipment. Trustees and volunteers may also not have the experience or training to recognise a potential threat.
Risks relating to safeguarding may also need reviewing in light of remote working. For example, this could include meetings with service users moving to video calls.
Again, charities will need to update their risk register to ensure it reflects the new way in which they are working and the ways in which they manage staff and volunteers.
As Covid restrictions ease, case numbers remain high. We are yet to see the effect of the war in Ukraine and the rising cost of living on charities but it is likely these events will have an impact on the sector.
While we all hope for a more stable period following the turbulence of the last two years, the reality is that charities need to continue to adapt to our changing world.
That means remaining open to new opportunities, while recognising and dealing with risks.
By Cat Williams, Partner and Head of Charities & Not for Profit