Challenges to financial resilience are among the most serious risks facing the charity sector this year, according to new analysis from the Charity Commission.
The regulator published the information in its first-ever annual Charity Sector Risk Assessment, which identified systemic risks that could impact charities’ ability to deliver against their aims.
It reported that following the pandemic and cost-of-living crisis, many charities have faced increased financial pressures relating to costs and demand rising as donations have fallen.
The commission added that while the sector has “responded impressively” to these challenges, “financial resilience remains a core risk”, with concerns having shifted into other areas this year.
These include workforce costs, with annual return data suggesting that larger charities (with over £500,000 income per year) spent 23% more on delivering their charitable aims in 2023 than they did in 2019.
Another area of concern relates to challenges in securing sustainable public funding.
While government funding to the sector through contracts increased overall during the financial year ending 2023 (from £9.1bn to £10bn), the average value of contracts received per contracting charity remained broadly static (from £1.43m to £1.41m) against an inflationary backdrop.
Smaller charities are also facing particular pressure, the regulator said, with the average value of contracts awarded to charities with an income of under £25,000 dropping by more than 6%, compared with a sector average of around 1% between 2022 and 2023.
More charities report expenditure exceeding income
The risk assessment also found that 42.6% of charities had reported expenditure exceeding income in their 2023 annual return, up from 38.3% in 2022.
“The 2023 data continues a general trend of a steadily increasing number of in-year deficits that we have seen over the last five years, with charities drawing from reserves to bridge the gap,” the regulator noted.
It also said that while income to the sector has increased, compared with the previous year’s annual returns, expenditure has nevertheless risen at a faster rate.
Meanwhile, 22.5% of charities reported an operating deficit in their 2023 annual return, up from 20% in 2022.
‘Charity sector has shown incredible resilience’
Commenting on the report, Mark Simms, interim chair of the commission, said: “Read in isolation, our risk assessment paints a picture of considerable, cumulative challenges facing the charity sector at this time.
“For many individual charities, the risks of financial sustainability are indeed grave, and some charities are facing difficult choices, including to restructure operations or services.
“But it’s important to put this report into context. The charity sector overall has demonstrated incredible resilience over many decades, and indeed centuries, adapting and adjusting over time to the most serious challenges and enormous social, political and economic change."
