Back from the brink: How non-profit organisations can improve financial literacy after Covid

There’s no doubt Covid has hit the non-profit sector hard.

Fundraising became difficult with the likes of high street shops closing, and donors tightening their financial belts as they faced their own struggles.

The Charity Commission’s recent research says that more than 90% of charities have experienced negative impact from the pandemic. Meanwhile, 60% have seen a loss of income, while charity insolvencies are up by a third.

At the same time, service delivery is also under strain.

Research from Oxfam suggests that coronavirus could push half a billion people worldwide into poverty, for example. The NSPCC reported that helpline calls about domestic violence increased by 53% during the first lockdown.

Like other sectors, digital technology allowed many organisations to continuing functioning during the pandemic.

This presents an opportunity for real, long-term improvement.

Here’s what we cover in this article:

Organisational financial literacy

Reactive vs sustainable financial management

Overcoming the obstacles to sustainability

How things can be changed

Organisational financial literacy

Organisations are now assessing what worked well, and what can work better, as they seek to optimise new digital processes while taking tentative steps towards a stable method of operating.

Finance management is unlikely to be the first thing on the agenda, as much of the focus on non-profit leadership over the past few months has centred on practical questions of digitalisation: how organisations can make the switch to digital methods of fundraising and service delivery, as well as working out the nuances of managing a remote workforce.

But if more non-profit organisations (NPOs) than ever before must compete for a shrinking pool of funds, finance management is a fundamental and unavoidable issue.

Sage and Charity Digital conducted research into the current levels of Organisational Financial Literacy (OFL) in the UK non-profit sector.

This research culminated in a framework designed to provide non-profit finance staff with the necessary tools and expertise to operate effectively.

The research indicates that impact reporting continues to be an issue in the sector—with the annual reports of many NPOs failing to explicitly state their organisation’s financial performance indicators and objectives.

This was supported by independent research already conducted on the UK charity sector.

This lack of reporting has a number of effects, including a crisis of accountability.

Without detailed financial records, non-profits are unable to provide transparency to stakeholders, both internal and external. This puts them at a disadvantage when applying for further funding.

Secondly, the failure to produce timely and accurate financial reports leads to an inability to forecast and benchmark for the future.

This means meaningful financial planning is impossible.

Without providing detailed information on current financial performance NPOs will struggle to plan existing activities or pilot new ones.

This jeopardises future fundraising prospects, leading to further financial insecurity.

Reactive vs sustainable financial management

It’s easy for non-profit leaders to fall into a reactive financial mindset. In an uncertain financial landscape, this may seem the only option.

However, a planned approach can provide greater sustainability for the long term, allowing NPOs to make decisions based on the financial data they have available to them now.

The more detailed your bookkeeping, the more financial data you will accrue. The more data you have, the more informed your decision-making and planning process will be, allowing your organisation to build a more sustainable future.

It all boils down to a simple question: is your organisation’s finance management reactive or sustainable?

A reactive model is just what it sounds like.

Decisions are made as a response to changing circumstances, rather than as a result of prior planning. There may be no planning at all, or plans may be discarded or changed as a result of unforeseen circumstances.

It means NPOs are driven by the expenses of day-to-day necessities. If a fundraising event is cancelled or underperforms, finance staff rush to find a solution.

When stuck in a reactive mode, almost every financial decision a non-profit makes is determined in the moment. Leaders rarely take the time to think through the consequences, or consider the end game.

A sustainable model is the opposite of this.

NPOs with a sustainable model strive to operate within their means. They have a clear and accurate appraisal of the resources (financial and otherwise) at their disposal, based on detailed, regular and timely impact reporting.

These organisations have a wide range of financial data available to them. Finance leaders of these kinds of organisations will find financial planning easier and more effective.

Organisations with a sustainable model make financial decisions based on impact reporting of prior financial performance and goals set at regular intervals.

If a significant event occurs, plans can be amended. But they won’t be discarded.

Contingencies are built into them, to account for obstacles wherever possible. Revenues are set aside as a prudent reserve—a lump sum, to cover operating costs for one quarter, or a year, and so on.

Overcoming the obstacles to sustainability

The research also highlighted a number of issues preventing NPOs from improving their financial planning and achieving sustainability.

Most prominently reported is a lack of capacity.

Many smaller organisations do not have dedicated finance staff. Instead, workers split the finance function with other duties.

This means finance activities are likely to be neglected, or rushed. Workers are also likely to lack the proper training to fulfil the finance function successfully.

The research indicates that these organisations are primarily using paper-based accounting methods, or simple spreadsheet processes.

These unsophisticated measures are appealing to time-poor organisations because they appear simple to get started with.

However, it’s easy to make mistakes using paper and spreadsheets, and these ineffective methods of bookkeeping could lead to problems later down the line.

In addition, they provide low value in terms of financial data gathering.

By automating core back office processes using technology, NPOs can achieve two things.

They can gather financial data more effectively to build a more sustainable plan.

And they can address issues of capacity, allowing workers to optimise time spent on the finance function, while freeing up resources to concentrate on other areas, such as fundraising and service delivery.

How things can be changed

To automate financial processes, several issues must be addressed. If capacity is understood to be the primary obstacle to achieving financial sustainability, then the root causes driving these capacity issues must be overcome.

The first is a lack of finance training in the sector.

By educating charity finance workers on how to use finance management software, the burden of an overworked and undertrained charity finance staff can be lightened. The issue of capacity can be addressed.

Of course, this educational element will not be helpful unless NPOs have access to this software. A variety of discounts are available from companies. Sage Foundation is committed to supporting NPOs in this way.

Finally, a programme of social support is crucial to charities looking to make the switch to a more sustainable financial model.

This could take the form of a combination of peer-support and skills-based volunteering, with trained finance professionals from both inside and outside the non-profit sector offering their expertise to help guide a new generation of charity finance professionals.

Once again, Sage Foundation offers assistance here in the form of the NPO Success Hub, which offers specially tailored tools, resources and expert training for NPOs.