The impacts of inflation on charities reserves

Published by Sam Rouse on 9 May 2023

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Sadly, when the price of goods and services rise, there is no immunity for charities, they have to face the same problems as everyone else. Rising inflation puts further pressure on already stretched funds, whilst then having additional cost impacts, for example, staff may demand inflation-adjusted pay reviews, in reaction to their own rising cost of living.

On the whole, charities cash reserves have typically been generating an interest below that of inflation for a long time already, with this issue only exacerbated still further with higher levels of inflation, causing charities to seemingly suffer an even more significant depletion of their cash sums, in real terms.

Remember, this is not an isolated incident, but comes off the back of the Covid-19 pandemic, which had already caused all manner of issues for the sector, and for a lot of charities had helped to identify how vulnerable their finances were. So, to spread these already tight finances even further, will put some entities in real danger unless management and trustees take appropriate and early action.

For the majority of charities, their income will largely come from a combination of donations, and grants, with any further spending coming from their existing pool of reserves. These are three areas that are very likely to impacted by fluctuations in rates of inflation. For example, in regard to donations, this may simply be that the donation value will at best remain static, meaning that the same amount of income will not represent the same value to the charity, given the growth in costs.

The cost-of-living squeeze is likely to ramp up demand for the need to support those in society whom are already amongst the most vulnerable, a group of people who are already heavily reliant on the support the charity sector. With increased expenditure, and an even tighter pot of income to nibble at, it may be increasingly difficult for charities to step up and meet those demands.

Charities such as museums, zoos, galleries, that rely on footfall and consumption of individual members of the public, are also likely to experience drops in their income, because people will have less of their own disposal income available to spend on such causes and activities.

Communication will be vital amongst management and the trustees, requiring good open, honest, and regular conversations, whilst keeping tabs on budgets and cashflow forecasts, ensuring that these are being updated in a timely manner. It will be key to maintain this, as those charged with governance need to factor in these costs, knowing that the impact of the inflation rises may last for years to come. Trustees will also need to ensure that the Charity’s reserves policy is updated annually, to reflect both the internal and external funding pressures.

It is important that trustees ensure they are maximising the good that their available cash reserves are doing, working them as hard as possible to sustainably drive the Charity forward, despite the issues being faced. A charities reserves need to be utilised to their fullest, whilst allowing as much flexibility as possible in an ever more challenging world.

Even before the hikes in inflation this year, we were already increasingly seeing (notably as a consequence of the hard work a lot of charities put into reviewing their projects and activities during the covid-19 pandemic) charities use their reserves smarter and more efficiently, and it will prove to be essential that such an approach is continued moving forward.

It remains to be seen how long this period of high inflation will last, but now is the time for the sector to maintain prudency, whilst we all ride out the storm together.

If you have concerns about inflation on your charity, or need further guidance on utilising your reserves, please contact us today.

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