Inflation is eroding financial sustainability

Olof Williamson was a Senior Consultant at NCVO, looking at the latest thinking on funding, finance and public services. Olof has left NCVO and his posts have been retained for here for reference.

A common misconception about Sustainable Funding is that it is just about bringing in more income. But outgoings have a huge influence on an organisation’s long-term financial health, and our new Almanac shows managing these costs is getting much harder.

According to the Civil Society Almanac 2013, inflation is eroding income to the sector at the same time as costs are rising. This is putting the squeeze on voluntary organisations and threatening their sustainability. Researcher Pete Bass sets out the inflation facts on the Almanac website.

How the figures look

During the time period 2006/07 to 2010/11 the voluntary sector’s income held steady in real terms at just under £37bn in 2010/11 prices. Although the cash value of income rose throughout that period, inflation eroded the real value of that money so real income barely shifted for five years.

Meanwhile, the expenditure of the voluntary sector has risen to very near income, closing the gap between income and expenditure and narrowing the range of options for organisations, as Pete’s chart shows.

Voluntary sector income and expenditure graph

Consider a charity providing care for older people. Over the last year they will have seen fuel inflation of 4 percent and food price inflation of 3.7 percent (2012-13 figures from ONS). And they may well be among the many charities and companies who have saved money by making a below-inflation pay award. All of this will have increased their costs of doing business, and of achieving their impact.

Meanwhile, the same charity will most likely have seen their income either held at the same real-terms level, or decreased. Many government commissioners are freezing contract values, and recent figures show donors are often not able to give more. These factors probably explain why the proportion of charity leaders who expect their organisation’s financial position, “to worsen over the next 12 months” is stuck at over 50 percent (see Charity Forecast survey).

So put simply, the charity is seeing costs rise significantly while income stays the same or reduces. These are not good conditions to run a sustainable organisation.

(Pete goes further in analysing inflation’s effects on different sources of income in a further Almanac post here.)

What’s the impact?

Running services with income below costs is a sure way to reduce short-term sustainability, by eating into reserves and storing up cashflow problems. It also affects long-term strategy, by removing much needed funds to invest in new services, innovate and find new, more efficient ways to achieve your impact.

Sometimes a tight financial situation can encourage efficiency and innovation – after all, crisis conditions can encourage creativity. However, an unending squeeze on resources can just mean the running down of organisations that are already wringing every drop of impact from their income. Often further savings are hard to make, all the leaks have been plugged already.

Going beyond cuts to services

One answer to this pressure to save is relentless incrementalism. This is where you make hundreds of tiny improvements to your organisations’ working practices.

This was used by the GB Olympic Cycling team last summer. Coach Dave Brailsford, when challenged by the French team to explain GB’s success, joked, “the trick of our wheels is they are round, really round.” The serious message was that they had improved every aspect of their athletes’ preparation and their technology (the bicycles) so that they had the edge of the competition.

Team GB also worked carfully on their athletes’ diet, not just the number of calories but the types of food that will give optimum performance.

It is the same with an organisation’s income. For each charity, the right income mix will be crucial. Refreshing your income strategy is a great way to find different sources of funding that are a better match for your organisation and that can improve your organisation’s sustainability.

The downward pressure on voluntary sector income is here for the forseeable future, and rising costs are lessening the value of the income we do have. Your own response will be crucial to securing your organisation’s sustainability.

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