Financial resilience: what funders now expect post cost-of-living

Navigating the New Funding Landscape: Building Financial Resilience for UK Charities

The past few years have presented unprecedented challenges for the UK charity sector. The cost of living crisis, compounded by lingering effects of the pandemic and economic uncertainty, has placed immense pressure on organisations and the communities they serve. In response, funders are – understandably – scrutinising financial stability more closely than ever before. This article explores what 'financial resilience' now means in the eyes of funders, and crucially, how small charities and Community Interest Companies (CICs) can demonstrate it, even without a dedicated finance team.

It's no longer enough to simply have positive bank balances; funders want to see a proactive, strategic approach to managing resources and mitigating risks. The good news is that demonstrating this resilience is achievable, often with tools you already possess and a shift in perspective.

Key takeaways:

• Funders now routinely expect to see a robust reserves policy.
• A detailed 12-month cash flow forecast is essential for sound financial planning.
• Diversifying unrestricted income streams is a clear signal of sustainability.
• A mixed portfolio of funders demonstrates reduces reliance on any single source.
• Financial resilience is not just for large charities; it's achievable with careful planning and readily available tools.

Understanding the Funder's Perspective

Why the increased focus on financial resilience? Funders are stewards of charitable capital. They want to ensure their investments deliver maximum impact and are not wasted on organisations that might collapse mid-project due to financial instability. The cost of living crisis highlighted vulnerabilities across the sector, prompting a re-evaluation of what constitutes 'good' financial health. They're looking for evidence that their grant will contribute to long-term impact, not merely act as a temporary stopgap.

This scrutiny isn't intended to penalise smaller organisations, but rather to foster a healthier, more sustainable sector. Funders understand that many smaller charities operate on tight margins. What they seek is not perfection, but a thoughtful and proactive approach to managing financial risks and opportunities. They want assurance that you've considered potential disruptions and have a plan to weather them.

The Cornerstone: A Robust Reserves Policy

One of the most significant shifts is the expectation for a clear, board-approved reserves policy. This isn't just about having money in the bank; it's about having a documented strategy for why you hold reserves, how much you aim to hold, and what circumstances would trigger their use.

For small charities, this can feel daunting. However, it doesn't need to be overly complex. Start by defining what your reserves are for. Common reasons include:

• Covering unexpected costs (e.g., emergency repairs, sudden loss of funding).
• Bridging gaps in income (e.g., between grant cycles).
• Investing in strategic development (e.g., a new programme, staff training).
• Covering notice periods for staff in case of closure.

Once you've identified the purpose, calculate a target level. Many organisations aim for 3-6 months of core operating costs. This isn't a hard and fast rule; adjust it based on your charity's specific risk profile. Crucially, the policy should also outline how you plan to build those reserves and how they will be governed. Presenting this clear policy demonstrates responsible financial stewardship to funders.

Forecasting the Future: The 12-Month Cash Flow Forecast

A static budget, while useful, only tells part of the story. Funders are increasingly asking for a 12-month cash flow forecast. This dynamic tool predicts the movement of cash in and out of your organisation over the coming year, month by month. It highlights potential shortfalls or surpluses well in advance, allowing you to take proactive steps rather than react to a crisis.

Building a cash flow forecast doesn't require specialist software. A simple spreadsheet can be highly effective. List your expected income (grants, donations, earned income) and outgoings (salaries, overheads, project costs) for each month. Don't forget seasonal variations in income or expenditure. This forecast is a living document; review and update it quarterly, or even monthly, as circumstances change. It’s a vital internal tool that also provides funders with confidence that you understand your financial pipeline.

"A responsible trustee board will ensure their charity has sufficient reserves to be financially sustainable and able to continue its work helping beneficiaries." – The Charity Commission

Diversifying Income: Beyond the Single Grant

One of the most impactful ways to demonstrate financial resilience is through a diversified income base, particularly a healthy proportion of unrestricted income. Relying heavily on one or two large, restricted grants can create significant vulnerability. If one of those funders changes their priorities or ceases their programme, your charity faces a cliff edge.

Unrestricted income (e.g., individual donations, trading income, unrestricted legacies, membership fees) provides flexibility. It allows your organisation to cover core costs, respond to emerging needs, and bridge funding gaps. Funders see a strong unrestricted income line as a sign of broad support and an ability to respond agilely.

Consider mapping your existing income streams and identifying areas for growth, even small ones. Could you run a community fundraising event? Explore a small trading activity? Launch a regular giving campaign? Even a modest amount of unrestricted income can make a significant difference to your perceived stability.

Spreading the Risk: A Mix of Funders

Related to income diversification is the importance of a diversified funder mix. While it's tempting to pursue the largest possible grants, becoming overly reliant on a single funder carries significant risk. Funders themselves recognise this and appreciate charities that actively seek support from a variety of sources – be they trusts and foundations, corporate partners, local authorities, or individual donors.

A diverse funder mix demonstrates that your work resonates with a broader audience and that your organisation is not solely dependent on the whims of one major donor. It showcases your ability to build relationships and secure support from different sectors. Aim for a portfolio approach, where no single funder accounts for an overwhelming proportion of your annual income.

Practical Steps for Small Charities

You don't need a finance director and a complex accounting system to achieve these goals. Many small charities successfully demonstrate financial resilience using straightforward methods.

Work closely with your Treasurer: Your Treasurer is a key asset. Ensure they are actively involved in financial planning, not just signing off accounts. Regular meetings to review cash flow, assess reserves, and discuss financial strategy are crucial.

Leverage Spreadsheets: A well-organised Excel or Google Sheet can effectively manage your budgets, cash flow forecasts, and even track restricted funds. There are many free templates available online.

Regular Review Cycle: Institute a quarterly review of your financial position with your board or management committee. Discuss your reserves policy, review the cash flow forecast, and assess progress on income diversification strategies. This regular rhythm ensures financial health remains a priority.

Here’s a simplified breakdown:

Next Steps

Review your current financial practices against these expectations. Start by drafting a reserves policy if you don't have one, or updating an existing one. Then, develop a simple 12-month cash flow forecast. Engage your trustees and team in discussions about income diversification. By proactively addressing these areas, you'll not only enhance your charity's financial health but also significantly strengthen your funding applications.