NOWHERE MORE KEENLY is the government’s programme of austerity being felt than in the voluntary sector, where cutbacks in state funding, falling donations and increased levels of social need have left one in six charities fearing they may face closure in the coming year.
Research commissioned by the Charities Aid Foundation found that 80% of charities believe the sector is facing a crisis, while nearly half have been forced to dip into reserves to maintain their work. The sentiment is understood all too well by Nick Lee, director of finance at Broadway Homelessness and Support, a London-based homelessness charity that derives 95% of its income from government funding.
“It has a huge impact on the overall funding of the charity. The only way we can be viable is to deliver more services with less overheads without reducing quality,” Lee tells Financial Director.
According to its latest annual accounts, Broadway was running at a larger than planned operating deficit of £219,000 set against a background of reductions in statutory funding. Lee says the charity has had to contend with funding cuts over five successive years from local authorities, councils and the Department for Communities and Local Government.
Headline total income at Broadway actually increased in 2011/2012 to £13.2m from £11.5m the year before, while grants and income from services remained broadly the same at £7.6m. However, this is slightly misleading as the organisation’s “margins have been slashed”. Generated income may be up, but profitability from services has become more difficult to achieve.
By Lee’s own admission the charity provides a “complex basket of services” – ranging from housing, to health services to helping people find work – that are expensive to run. As a consequence, finance has had to drive down costs and invest in new areas to find funding from elsewhere; chiefly by increasing voluntary donations from the public.
So far, support costs have been driven down to 12% from 18% of turnover, though Lee says this would ideally be 10%. “Clearly we need to grow the size of the organisation and achieve greater economies of scale,” Lee explains.
The group went some way towards achieving when it merged with Threshold Housing Advice in late 2011. The catalyst for the merger was partly the economic situation of both organisations, though merging the two advice services created a stronger offering. Lee says Broadway is actively pursuing merger opportunities where there is the potential to complement existing services and extend their reach, though Lee points out that acquisitions must meet a “set criteria” that matches Broadway’s strategy.
Lee adds that although the acquisitions are generally small – Threshold had 22 employees to Broadway’s 225 – the due diligence process is a rigorous one.
“What are the key risks, what are the contracts, what is the length of the contracts? We don’t want to be left with redundancy costs,” Lee says. “We do our own due diligence on staff costs, then we look at the cash position in relation to potential liabilities – what it costs and how soon can we recoup our investment.”
Working within the constraints of a modestly sized finance function means there are “limited resources” to the amount of “people time” that can be dedicated to the process. “All the key managers are on the service delivery team and all have a development role,” Lee says. “There is a management accountant that supports the tender process.”
The due diligence process has paid off. According to Lee, pension liabilities can be a deal breaker and, in one instance, Broadway was forced to break off merger talks. “Final salary pensions have been a deal breaker in mergers. We were talking to an organisation about a possible merger. They had significant liabilities and we couldn’t merge with that,” he says.
Speculate to accumulate
Of more immediate concern to Broadway and Lee in particular, has been to manage costs within the business and tap into more funding from voluntary donations. This, however, has meant the company has had to invest in fundraising, marketing and communications, spending £90,000 on two posts – including upgrading its head of fundraising – and on a partnership with a housing association in Gosport.
In 2011/2012, Broadway was able to increase its voluntary income to £382,039 from £253,285 and Lee expects a “fairly consistent return” from the investment in fundraising and hopes it will reach £500,000 over the next two or three years. However, the business has to cope with the time lag between the investment and the return.
“You have got to have money in the bank. We are constrained by the strength of our reserve, which has gone from over £2m of free cash reserve down to around £1.2m over four years,” Lee says, adding that part of that is down to “deliberate investment”.
Tough decisions have had to be taken in other areas. To improve its financial position, Broadway decided to sell Corner House, its property in Broadstairs, which was previously used to offer clients respite breaks and learning trips. Additionally, to safeguard existing services and remain cost effective, the business has had to review staff costs, by far and away its largest expense item at £5.9m in 2011/2012.
“In 2009 the VAT concession for staff costs was cut, that took £250,000 off the bottom line,” Lee explains. “We have come off the national pay scale and have moved to a market testing approach. For the last three years we have only paid to the median, and we adjust our pay scales if wages are out of line.”
Despite the headwinds, the outlook for Broadway is not entirely bleak. New business income has exceeded expectation, with £147,000 earned including Threshold projects and a project focused on first time rough sleepers, and before the addition of a further £161,000 to its general reserves from Threshold’s accounts – over £300,000 in total added through new business growth.
In 2011/2012 Broadway’s services reached 7,281 homeless and socially excluded people in London. And as a self-confessed “frustrated social worker at heart” who has worked in the care sector for 25 years, that is probably the most important outcome for Lee.
2008-present Director of finance & central services, Broadway
2006-2008 FD Centre, various part-time FD roles for care providers including Central Surrey Health
1995-2005 FD, Quantum Care
1990-1995 Management accountant, Action for Children
2004-2007 MBA with Open University