The sector that cried wolf?!

 

Lev Fejes

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It is the understatement of the year to say that the COVID-19 pandemic has had a significant effect on our private and social lives, as well as on the economy. The third sector constitutes no exception, as charitable organisations across the globe have been affected both by the economic effects of Covid-19 as well as by the public health measures designed to minimise the spread of the disease and to mitigate its impact.

Also, in many countries, the third sector was quickest to react at the onset of the pandemic[1]. Many organisations have placed their mission on hold in order to raise funds, supply first responders with PPEs and hospitals with ventilators, and to provide services to those most vulnerable in the face of the disease and the public health restrictions. By doing so, organisations faced an increased threat to their incomes and their existence due to the:

  • Cancelation of community fundraising events;
  • Closure of charity shops and the effects on other income generating activities;
  • Effects of the economic downturn on individual earnings and donation behaviour.

Numerous voices have raised concerns about the financial risks facing voluntary organisations, as results of multiple surveys induced a sense of a potential existential threat, to what seemed to be a significant portion of the third sector. Surveys of hundreds of organizations in Europe and around the globe by the European Fundraising Association and the Charities Aid Foundation America[2] painted a dire picture, but firm evidence about the nature and size of the risks posed to charities was lacking.

That is precisely what professor John Mohan and his colleagues have set out to provide in the ERNOP Science and Society Seminar that took place on June 22, 2021. By looking at the financial reserves of English and Welsh charities, examining the income dependence and diversification of UK charities at the onset of COVID-19, as well as the impact of the pandemic on the foundation and dissolution of charitable organisations, the project was able to map the risks, provide tangible evidence with regards to the effect of the pandemic on UK charities, and contour a profile of the organisations most likely to be affected.

According to the findings, these organisations tend to:

☑️ Have low levels of reserves;
☑️ Be young– less than 10 years;
☑️ Have a highly concentrated income profile with >90% of income from one source;
☑️ Their field of activity is NOT in culture and recreation, environment and religion;

Have income generated through charitable activities (as these were the most affected by the public health measures taken to minimise the spread of the disease).

While ‘ticking all the boxes’ obviously places the charity in the danger zone, that does not mean that all that fit the profile have suspended or ceased their operations, or worse, have gone into dissolution. Indeed, the difference between perception (surveys) versus official data is clear: dissolution rates of UK charities are generally low, nowhere near the prognostications of surveys, with no obvious sign that the number of dissolutions has increased during the examined period. Accordingly, while the sector ‘cried wolf’, as the general uncertainty, combined with the financial profile of charities produced a general alarmed state, these studies indicate that the sector (at least in the UK) has proven to be more resilient than one could have hoped for. In addition, there is also evidence that donors have proven to be more steadfast[3] than expected given the circumstances.

These studies provide a much-needed evidence base, but also raise additional (more practical) questions. For example, since financial reserves are low ‘across the board’, should organizations strive to increase their reserves, or should they look at other means to secure their financial stability in times of crisis? What would be the minimum set of indicators that a charity should look at when considering changes to their reserves policy in the current context? Should they consider changes to their reserves policy at all in the current context?

While these may or may not be answered with existing data, they should nonetheless be explored, as we are not out of the woods yet in terms of the pandemic, and financial sustainability and resilience have long been key issues of the sector. Therefore, at the very least, charities should take note of the findings of these studies, examine their own risk profiles and take the necessary steps to increase the financial resilience. This however will not be possible without charities reassessing their policies and practices on reserves and income sources, AND funders re-examining their current funding practices. I bet that sounds all too familiar, doesn’t it?

Lev Fejes is Head of Research at ARC Romania


Footnotes

  1. ^ e.g. Romania.
  2. ^ CAF, in partnership with Indiana University Lilly Family School of Philanthropy and The Resource Alliance has repeatedly polled hundreds of organizations from over 150 countries on the topic.
  3. ^ For example, Direct Debit and text donations in Romania have increased during the pandemic, while other countries have reported that donations have remained steady despite the pandemic (see for example Spain).

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