For UK registered charities that are not sector regulators, three major scenarios to consider are as follows, when updating the charity five year plan.
1. Intense sector competition for charity grants and donations.
From a risk management perspective, it’s unwise for any charity to rely on one dominant source of income alone, whether from membership subscriptions, government grants, public appeals, research grants, foundation grants or major philanthropy donations. Why? It puts too much power in the hands of the funder and if funder priorities change, the charity concerned can quickly face an income shortfall.
As charities diversify their funding sources, competition intensifies for that funding. Grant funders that hold the upper hand, are likely to dictate the grant funding restrictions more strongly, including providing ‘proof of concept’ initial funding packages, imposing low overhead funding stipulations, providing just-in-time funding tranches and/or placing greater requirements for bespoke funder reporting (progress reports) from the charity.
As a risk mitigation, a prudent charity, with one dominant income stream, would make much of its cost structure variable to the dominant funding source. It might phase its spending only when that funding is actually received in cash. Even then, for grants received, true entitlement relies on the grant conditions being met in full.
A second risk mitigation (for the risk that funders suddenly turn away from charity funding) is to design multi-year charitable programmes and seek commitment from funders to multi-year funding arrangements.
A third risk mitigation would be to diversify income away from charitable sources alone, perhaps into commercial income streams as well. This may involve launching one or more commercial trading subsidiaries, complete with their own commercial boards.
As charities diversify their funding sources, from unrestricted donations into restricted grants say, it may become more challenging for the charity to align its charitable spending programmes with its core mission. Perhaps a pragmatic solution is to then widen the mission!
2. Soaring beneficiary demand
As environmental conditions alter adversely, fuelled by AI and global warming changes, then for charities providing aid, support and/or empowerment services to human beneficiaries, they can anticipate soaring demand for their services, perhaps soaring at an exponential rate.
In addition, if the charity programmes are international in their reach, beneficiary demand may soar quicker and bigger than if the charity programmes are purely domestic in their reach.
With soaring demand, a more disciplined strategic focus and charity agility (pivoting) are then needed to cope. Risk-based assessments and means testing of beneficiaries may need to become more efficient, to deliver maximum impact in a growth market. More intense efforts to avoid rework may also be needed.
3. Resource quality or Scope of Service Trade-offs
At present and subject to data analysis to confirm, there appears to be a growing backlog (an underinvestment gap) in the fundraising charity sector, in digital infrastructure investment & charity workforce upskilling. Investment is happening. But it’s uneven across the sector and arguably more reactive than proactive. In addition, the emerging opportunity of adding AI resources to aid charitable activities will simply add to the gap.
For charity boards of trustees who are unwilling to approve that digital and workforce investment, they have 2 choices. One is to expect a downgraded quality in charitable services. The other is to force a reduction in annual charitable spending, to remain Reserves Policy compliant and maintain annual operating surpluses, or break-evens.
On the first option, downgrading quality will likely reduce future fundraising success. Except where the remaining funders celebrate charity cost leadership and a ‘no frills’, basic approach to helping beneficiaries.
On the second option, reducing charitable spending budgets needs to align to a deliberate, downwards adjustment in charitable services (scope, range and/or reach), as expressed in the latest Strategic Plan.
A market contraction may then encourage new charities to step into that vacuum. The problem then is those new charities will likely compete with the incumbent charities for grant and donor funding, including from the prevailing sources.
A separate point is that sizeable change programmes undertaken within the charity, whether to modernise, innovate or become more efficient, will need designated reserves. Because of timing delays and uncertainty on fundraising success, it’s unwise to assume next year’s operating cashflows should be used to fund them. Furthermore, for change programmes that enable seamless scaling of the charitable activities over time, they will likely require even more funding, to design in that scalability.
Lastly, using volunteer workers boosts charity workforce capacity. But it may also dilute the resource quality, create incentive challenges and perhaps create control problems (accountability and keeping enthusiastic people on task).
Simon