The squeezed middle: small and medium-sized charities in a changing financial landscape

Over 40,000 charities in England and Wales have an income between £25,000 and £1m, representing one-third of the voluntary sector. Today, NCVO published a report, commissioned by Lloyds Bank Foundation for England and Wales, that explored the finances of these small and medium-sized charities to improve our understanding of the challenges and opportunities that they face.

You can download the full report here (PDF, 1.4MB)

Take-home messages from our analysis

Income for smaller charities is unstable

Small and medium-sized charities were more likely to experience substantial income change (a rise or fall of more than one-fifth) than larger charities between 2008/09 and 2013/14.

Looking at individual charity accounts we found that this is probably because smaller charities rely on fewer sources of income, while larger charities have more diverse income streams so that eg a single grant has less impact on their overall income.

We also investigated one income band, £100,000 to £500,000, in more detail and found that these charities were more likely to lose than gain income over this time.

The income mix for small and medium-sized charities has shifted

Between 2008/09 and 2012/13 small and medium-sized charities lost income from central and local government in the form of both grants and contracts. However, they increased their earned income by up to 60%, replacing some of the lost income from government, but not enough to cover the shortfall.

Charities that had seen no increase in government funds were more likely to increase their earned income, suggesting that individual organisations were consciously shifting their approach to income generation. Indeed, text from charities’ accounts told many stories of developing partnerships and mergers with other charities, exploring financial mechanisms such as social impact bonds and setting up social enterprises.

Smaller charities fared worse (proportionally) than larger charities

Comparing income bands is tricky as they encompass such different-sized organisations using different strategies to solve different problems. For example, according to NCVO Almanac data for 2012/13 only around 40% of charities between £10,000 and £1m actually receive government funding compared with 70% over £10m. However, our data does seem to indicate that in comparison to larger charities, small and medium-sized charities have proportionally lost more of their government income and gained less income from individuals.

How are small and medium-sized charities coping?

As well as increasing earned income sources, smaller charities have changed the way that they spend money. In general they now spend slightly less on charitable activities and more on generating funds.

Unusually the £100,000 to £500,000 income band showed the reverse pattern, but also decreased the amount it spent on staff costs by half. This could have longer-term implications for the financial sustainability of such organisations.

So what?

Overall our research has highlighted that small and medium-sized charities experience higher income volatility than larger organisations, making them less resilient to external change. Also, while some individual organisations are clearly weathering the storm and even thriving, the policy environment is generally favouring the growth of larger organisations. These are more stable financially and have the resources to bid for remaining government funding in an increasingly competitive marketplace. This is of some concern, given that research, also published by IPPR North today, has highlighted the critical but often unseen role that small and medium-sized charities play in tackling disadvantage and supporting communities.