Funding groups in crisis
Gaynor Humphreys, Amanda Tincknell and James Sinclair Taylor summarise issues facing funders and their beneficiaries as spending review cuts are being rolled out
Gaynor Humphreys
Forty London funders came together recently to talk about the growing crisis affecting voluntary and community groups as public expenditure cuts bite and other funding sources are under more pressure – whether there is demand from groups staring disaster (or just temporary cash challenges) in the face, what approach funders should take to these, what technical knowledge is required and whether non-financial support helps. This article summarises some of the key points arising from this ‘Learning from Funders’ event.
Ciaran Rafferty, principal grants officer at The City Bridge Trust shared his trust’s experience and the findings from a recent survey of other funders. Despite rising applications, his trust has not yet been hit by unmanageable demand nor by many requests for emergency support. They expect a continuing increase in demand and a consequential need for flexibility in decision-making.
City Bridge Trust recently surveyed funders and responses were received from 17 foundations and Big Lottery Fund. Applications are rising, after a dip in early 2010; funders have been discussing their policies in relation to the recession and its longer-term impact. Few have made any recent changes in their funding criteria, though some reviews are underway; theremay be a need for tougher assessment – looking for financial stability, more informed forecasting and a tight fit with the funders’ specific criteria.
Some funders will consider emergency support but normally only where they have funds already invested or where the work is strategically important to the sector. Others will support only financially robust organisations. Even those funders most willing to consider crisis support would only help where they would be supporting survival and longer term sustainability, not delaying inevitable closure.
"Most foundations will not directly replace funding from a statutory source nor assist with bailing out an organisation that might otherwise collapse"
Ciaran noted that while some applicants are waiting on the outcome of other key funding decisions, City Bridge Trust may have them ‘on hold’ – the trust will not be an organisation’s largest funder.
Most foundations will not directly replace funding from a statutory source nor assist with bailing out an organisation that might otherwise collapse. Funders with a clear policy of additionality to existing provision will have an increasingly difficult set of judgments to make in assessing applications.
One of the silver linings in the recessionary clouds lies in the way current radical change facing the voluntary and community sector might stimulate innovation in service delivery. Funding organisations to strengthen themselves or reduce costs is also a favoured approach. Cripplegate Foundation recently helped fund a group’s move to new premises to reduce its future running costs.
Funders see higher demand for services and tougher fundraising challenges for smaller community groups as well as medium-sized ones. The trend in some boroughs to cut grants pots in favour of commissioned contracts affects smaller organisations particularly acutely.
The pros and cons of partnership working and collaboration between groups are understood by funders: some methods can add to costs and mergers need investment before they deliver savings. The best reduction in overheads may come where one organisation outsources services to others, but setting this up will also bear a cost. Some funders add capacity building services to grants (help with strategic planning, financial management, eco-audits, access to training): these take a long view of support rather than the urgent action needed in a crisis.
There is also concern that the government’s Work Programme proposes to pay by results and in arrears. It appears there is a related short-term problem in the three-month gap between the end of existing contracts and the awarding of new. United St Saviour’s Charity is looking at how it, as a local funder, might help take the risk and London Funders has been publicising Westminster City Council’s idea for a transition fund through which other funders might support employment services until new contracts are awarded. Given the significant social upheaval this government’s policy changes will create, demand for voluntary and community services will change as well as increase. Funders recognise that their responsiveness to changed needs could be improved by sharing information, collaborating with each other, and considering joint pots of funding and new approaches to investing in the sector. Members of London Funders are looking at ways to develop these ideas.
‘Joined up’ thinking might help align timing of decisions so organisations could have a co-ordinated response from several funders. A final challenge at this meeting was Ciaran’s suggestion that London Funders promote a campaign to encourage all funders to recognise that cash-flow is crucial to organisations and that they be ‘fair and reasonable’ in the way they make payments, not protecting their own resources at the expense of funded groups by paying late, in arrears or in cumbersome steps.
Amanda Tincknell
For the past two years it feels as if the sector has been waiting for events to unfold. Following the 2008 banking crisis, we waited to see what the recession would bring, then we waited for the 2010 election. We waited for information on spending cuts, and following the initial announcements in October 2010 we are waiting to see how these will develop from April 2011.
"More charities are leaving it too late not only to seek our help, but to apply to funders for support, and we encourage organisations to come forward early"
At The Cranfield Trust, we work with over 200 small to medium-sized charities and voluntary organisations a year, providing free management consultancy thanks to our register of 600 commercial sector volunteers, who give their time free to provide capacity-building support, and building management skills and sustainability. With many organisations facing considerable challenges, issues of particular concern to us include:
- Forward planning. Many organisations are thinking again about their strategies and business plans in the light of likely cuts, but not as many as we would like. Scenario planning for different funding possibilities can be done even without confirmed information on future funds. We regularly see business plans for possible trading activities, often unrealistic. All planning needs to be pragmatic: over-optimistic forecasting creates false security for managers and boards.
- Low reserve levels from organisations whose fundraising has been hit by the recession, or have experienced cashflow problems due to late payment of contracts or other funding agreements.
- Cashflow forecasting is also vital. The positive climate of the last decade has encouraged reliance on budget forecasting and now we really need to know our cash positions.
- We encourage our client organisations to develop their knowledge of their competition. Many organisations do not have a good picture of other charities operating in similar or related fields, and plans now need to include merger as an option. Failure to identify and contact possible merger or collaboration partners early means a rush in times of crisis, and probably a less successful match.
- Governance skills are under strain with many organisations finding it difficult to recruit skilled board members able to navigate the choppy waters of commissioning, personalisation and other challenging initiatives. Chief executives should be well supported and strongly advised on areas such as strategy and risk; but often we see them struggling to bring their boards with them.
How can we help organisations facing crisis? Cranfield Trust volunteers focus on these issues, providing support to charities in:
- reviewing strategies and business plans;
- updating HR policies in case of redundancies;
- evaluating trading plans and other income generating activities;
- facilitating merger discussions; and
- mentoring chief executives.
More charities are leaving it too late not only to seek our help, but to apply to funders for support, and we encourage organisations to come forward early, to help develop realistic plans to cope with change and ask difficult questions such as:
- What is the cause of our financial problems? Loss of income? Poor cashflow management?
- What board and staff skills do we have to manage our way through difficulty, and how do we address gaps?
- Is our governance strong and realistic?
- Do we have a realistic plan?
- Do we have the skills and will to turn things around on our own, or is there another group we could work with or merge with to create a stronger service?
Just as funders do, we focus on services rather than organisations themselves: we all work to protect the increasing support needs of service users – maintaining organisations should be a secondary question.
To be successful in this climate we need our charity clients to be honest with us. Even if the picture is bad, we need to avoid shocks, have confidence in the relationship, and be realistic about our mutual expectations. We are also reviewing our response to charities approaching us for support to ensure that we add value with every contact. We will be asking for up to date management accounts, cashflow forecasts and information on related services from clients: if they need these to work with us, this will also stand them in good stead with funders and other supporters.
The voluntary sector is highly entrepreneurial, and we are confident that many organisations will meet the challenges of the current climate successfully. We are expecting to work with our clients over longer time periods and to develop our work in partnership with funders, helping charities access packages of funding and management expertise to support the vital services they deliver.
James Sinclair Taylor
I want to look briefly at three issues.
1) How should funders be helping the sector cope with hard times?
2) What are the risks for funders?
3) What steps should funders be taking to manage those risks?
Funders have a key part to play in helping voluntary and community organisations address the issues that must be got right if they are to survive difficult times. These will include:
- Encouraging the adoption of the right legal structures. Having unlimited liability in the current financial situation is simply not a viable model. Charities should be encouraged to convert to companies limited by guarantee if they have not already done so.
- Strong governance and the right mix of skills on the board is critical.
- Analysis of the strategic risks that a charity faces during a financial downturn is critical. For example, did staff transferred to the organisation come with TUPE transferred large redundancy liabilities or pension top-ups? Will the closure of other organisations impact on services being delivered, for example, if a community transport service closes down, what would be the impact on others that rely on these services?
- Organisations really need to understand how the rules relating to insolvency might impact on them. Organisations need to be supported so that they can understand the difference between a negative balance sheet which may not always lead to insolvency and the extreme dangers of an unsustainable cash flow.
"We are likely to see widespread closure of projects and voluntary organisations which will create a number of problems for funders"
We are likely to see widespread closure of projects and voluntary organisations which will create a number of problems for funders. These will include:
- Loss of outcomes – funders fund in order to deliver outcomes. They should consider what steps they are going to need to take to ensure that viable projects are rescued from failing organisations. We need a more activist funding sector that will assist rescuing what can be saved from what will undoubtedly be some nasty financial wreckage. One of the key solutions here is getting organisations to take a timely and realistic look at whether they continue to be viable on their own and whether merger or transfer of projects is the way to save valuable social outcomes.
- Damage to reputation – funders value their reputation for delivering effective support and funding. The impact of failure of the bodies they support needs to be assessed. Would it be sensible to consider short term financial support where there is the prospect of long-term viability? Would additional support allow appropriate solvent wind-up rather than untimely collapse? Will closure mean that some other body has to take on key functions?
- Loss of monies – funders have always used claw back provisions and mortgages and other forms of security. This may be a period where it is going to be necessary to extend their use.
- Loss of assets created – a funder may have supported an organisation which has created or purchased assets. These may be land or equipment but could just as well be intellectual property, know-how or skills. Seeing if these can be rescued from the wreckage must be a key funder concern where funded organisations collapse under current financial strains.
- Liability for the funder – it is rather unlikely that a funder will find itself liable for the debts of an organisation it funds but it clearly needs to ensure that it does not give or appear to give guarantees. Another area where caution is needed is making representations about continuing funding on which others rely.
Public bodies that fund need to consider, when terminating or reducing funding, not only whether this breaches any contractual obligation, but also whether the reduction is likely to generate litigation in the form of judicial review. A number of voluntary sector bodies have successfully challenged loss of or failure to renew funding using judicial review. Public bodies, in particular, need to make sure that they maintain a proper process despite a pressing need to cut back.
Funders can help organisations or the outcomes which they deliver to survive in a range of ways. These will include speeding up their funding decisions and having clarity of strategy. Although it is difficult to look ahead, sector bodies urgently need to have some idea as to whether projects within their portfolio are likely to survive in the new funding environment.There is much that funders can do if the will is there.
1. Hosted by Buzzacotts in London on 25 January 2011
2. www.vawcvs.org/news/funding-review-report-and-next-steps
3. See Amanda Tincknell’s article ‘Reciprocal benefits’ in Caritas, issue 19, June 2009, page 31
Author: James Sinclair-Taylor
James Sinclair Taylor is a partner at Russell-Cooke and heads up the charities team.
He acts for a broad range of charities and also advises other not for profit organisations including local authorities and educational establishments.
He is a member of the Charity Law Association and co-author of the Voluntary Sector Legal Handbook.
Click here for other articles written by James Sinclair-Taylor
Author: Gaynor Humphreys
Gaynor Humphreys is director of London Funders.
She was previously director of WINGS (Worldwide Initiatives for Grantmaker Support) and before that worked with the emerging network of UK Community foundations
Author: Amanda Tincknell
Amanda Tincknell has been chief executive of The Cranfield Trust since 2000 and first joined the trust as a volunteer in the early 1990s, following her MBA at Cranfield School of Management and an early career in market research and recruitment.
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