Managing Your Finances in Challenging Times: Advice for Third Sector Organisations

The current economic climate has brought about a number of challenges for social enterprises, charities, voluntary and community organisations. Recently, our Alex Rooney, a Business Adviser in our Enterprise and Communities team with expertise in finance, has hosted a number of workshops in partnership with the Glasgow Council for the Voluntary Sector (GCVS) that focus on managing finances in these troubled times. In this blog post, we explore some of the key insights shared by him on the current landscape for social enterprises, charities, voluntary and community organisations, the factors affecting organisations in the current climate, and some key pieces of advice for managing finances.

The Current Landscape for Social Enterprises

Many organisations are struggling due to the loss of income. Those that have not returned to full capacity after lockdown are finding it difficult to generate income, and this is further compounded as there are still some people who are reticent to come out and enjoy the services of many businesses. This, combined with an increase in prices for everyone, is causing difficulties for many organisations.

Additionally, cuts to funding programmes are placing additional pressure on some organisations, with those that have lost their funding experiencing significant worry. The withdrawal of funding programmes is something which is, naturally, causing concern for those that are currently struggling to generate income.

Factors Affecting Organisations in the Current Climate

Increases in costs are one of the biggest factors affecting organisations currently. This increase can be seen across a range of areas, including utilities and fuel costs. The increase in fuel prices directly impacts organisations that deliver products or services and use their vehicles to transport customers or clients. In addition to fuel prices, there has also been an increase in food costs. This is particularly challenging for organisations in the social care sector that need to provide food to people. The unpredictable nature of inflation and rising costs makes it challenging for organisations to plan and forecast their finances effectively.

According to the National Institute of Economics and Social Research, there are three scenarios for inflationary increases over the next year. The medium scenario is a 2% per annum increase, which has been about the norm currently. However, they have a high estimate of 3% per annum and a very high estimate of 5% per annum. These increases are starting to be seen across the board, particularly in the increase in food costs.

Energy bills have also increased significantly, rising by 54% in April 2022 and a further 80% in October 2022. While this is specific to households, it will also have knock-on effects for commercial and industrial businesses. Indeed, the Federation of Small Businesses has reported that small businesses have experienced a 424% rise in gas costs and a 349% increase in electricity costs since February 2021.

Key Pieces of Advice

Alex shares seven main areas that organisations should concentrate on to manage their finances better in these challenging times.

1. Financial planning. This involves understanding your starting position by determining your day-to-day costs. He recommends considering, and planning for, different scenarios when setting your budget, including a worst-case scenario, which means taking into account inflationary increases, utility costs, and funding applications that have not been secured yet.
2. Know your tipping point. You need to know at which point your organisation could start to struggle. This can be based on financial information or other statistics, such as declining customer numbers. Once you know your tipping point, you can take action to address the issue before it becomes critical.
3. Communicate with your funders, particularly if you are experiencing difficulties with your finances. It is important to be transparent about your financial position and your plans for addressing any issues that arise. This can help to build trust and goodwill with your funders. During the pandemic, the Office of the Scottish Charity Regulator (OSCR) released guidelines which stated that due to the unique situation that was brought on by lockdown, it was possible that some funders may be willing to allow the use of restricted funds for different purposes. Whilst lockdown may be over, being open and honest with your funders could see them allow for similar provisions with restricted funds.
4. Use one-page reporting. This can be an effective way to monitor financial income and expenditure. This involves categorising basic income and expenditure and calculating surplus or deficit. It is also important to analyse your current ratio, which compares current assets against current liabilities that can be realised within a year. This analysis helps to determine if there is enough cash to cover all the money that needs to be paid. If liabilities are greater than assets, there may be financial trouble. Funders also look at this information, so it is essential to maintain a healthy position. Alex also recommends analysing unrestricted reserves by adding the surplus of the current year to the free reserves to get a clearer picture of the financial situation.
5. Be innovative and creative when it comes to generating income. Organisations should be open to exploring new ways of generating income and consider alternative funding sources. This can help to diversify your income streams and provide a buffer against any unexpected challenges. Finding alternate income streams can help organisations to become more resilient and adaptable to changes.
6. But if you find yourself struggling, protect the core. If you already are struggling, it is probably not a great time to diversify. Stick to what you do best to weather the current situation and ensure you can see it through.
7. Keep on top of regular payment obligations. That means, keeping your statutory records up to date, ensure you’re paying VAT and NI contributions. If you don’t keep on top of these, you face yourself paying penalties that just aren’t worth it.

With these tips in mind, you can make a good start at planning for the future.

Planning Doesn’t Have to Be Difficult

For many, assessing their organisation’s finances can be quite daunting. Hopefully the advice in this blog will spur you on to take control of your own financial planning.

However if you need a little more assistance, we can help. Get in touch for a chat to see how we could assist you, or check out our Just Enterprise website for information on upcoming workshops on this topic.