Last summer a highly-geared national charity folded. Gavin Williams explores why it happened and advises how others can avoid the same fate.
Are charities about to face a ‘perfect storm’ of challenges? If so, how should they react and change to enable them to continue delivering the essential services that society and the wider economy requires?
We all recognise that the not-forprofit sector is highly fragmented, with many small organisations operating side-by-side with large, almost ‘corporate’ charities. This is a regulated space and trustees always need to be mindful of their responsibilities. Especially now as they face, many for the first time, real economic challenge to their business models.
In June 2010, the charity Refugee and Migrant Justice (RMJ) folded. This was a disaster for the 300 staff who were left without a job, and for the 9,000 live clients left without legal representation. However, it is also a cautionary tale for all charities and their trustees.
High statutory-income ratio
With an annual income of £15m, RMJ was the second-largest recipient of legal aid in 2009/10. Its last accounts to 31 March 2009 showed the charity was generating a small surplus, and even had £3m cash in the bank. But crucially, 98 per cent of its total income came from statutory sources under contract from the Legal Services Commission.
Its subsequent failure, only months after publishing its 2009 accounts, illustrates how a combination of hostile economic conditions, government cuts and a changing regulatory landscape are creating a precarious environment for civil society organisations (CSOs).
During the 13 years of economic growth between 1994 and 2007, many organisations benefited from generous sponsorships and donations. For some, the good times became the norm. However, the last few years have seen unprecedented change, with a financial crash and major public spending cuts, and overall funding levels have dropped.
Whilst the economy is slowly beginning to improve, the problem is far from over. Historically, more organisations fail in the recovery phase than succumb in the earlier period when the economy first slows down. The reason is that as the economy stalls, businesses cut back, reduce staff, hunt for cash and therefore survive.
During the recovery phase, however, organisations will find themselves doing work for new clients, and this may require them to employ new staff and take on other new costs. Suddenly they are faced with working-capital problems.
In addition, as the economy recovers competition arrives, and charities are forced to fight others for resources. This time round the fight is not just with other charities, it is with organisations from across all sectors. The fact that a charity has cut back on its costs when times are tough may mean that it is not able to react quickly to the changes it will face in the recovery phase.