Considerations for grant making charities in uncertain times

Hand dropping coin into investing glass jars

03 July 2023

Grant making charities are a vital source of support in many sectors, and with the current cost of living crisis and economic uncertainties, grant making charities are being approached more than ever for financial support.

Within the sector, there is often an affiliation to the cause and a network of loyal and committed donors to a charity. Maintaining those relationships and engaging with donors has never been more important. Social media is a key means of reaching out to beneficiaries and donors alike.

From a financial perspective, the current uncertainties are raising a number of interesting questions for trustees to consider.

  • Rising interest rates – does the current environment merit a review of the investment and cash holding strategy? Is there a desire to place more or less on longer term investments, or hold it in cash? This will be driven by your strategy, but has your strategy been affected by the change in current economics?
  • Increase in demand – is the strategy of the charity to limit annual grants to budget, to ensure that current and future awards are balanced? Or, is there a desire to draw down more in the current period of potential increased financial need of beneficiaries?
  • Reserves and strategy – despite many financial reports having consistent reserves policies for some time, reserve policies are rarely static. The pandemic has evidenced a need to continually revisit and consider your reserve holdings, and to ensure that you have sufficient reserves to deliver your strategy. Now that the pandemic is behind us, is it time to revisit these areas and to refocus and communicate a new policy through the financial report and accounts?
  • Does a total return accounting policy merit consideration? – for endowed charities, the ability to utilise historical gains, previously tied up in the capital value of the endowment through the adoption of total return, has been extremely useful. The principle in its simplest form is that the difference between the original gift and the current value of the endowment can be utilised for grant making purposes. However, this is dependent on whether you can identify the value of the original gift(‘s) at a point in time. Any balance of the so-called unapplied income fund, can be used for additional grants or to protect a stable level of grant making activity in years where income returns may be less than desired. Such a policy should be approached with caution. However, for less established charities, the original value of the endowment must be protected. The selection of the investment strategy, and the amount to draw down on each year, is critical to ensure that the original endowment is preserved.

In addition to the considerations above, we are also seeing cost pressures on the administration of smaller grant-making bodies. Wage inflation is affecting every organisation, and we have seen smaller charities increasingly consider outsourcing solutions, particularly the day-to-day administration, accounting and grant processing of systems. This can provide better stability and continuity in the day-to-day running of the business, relieve the pressures on trustees, and provide enhanced financial reporting and forecasts to enable decision making.

A final consideration is ESG reporting.  The recent Civil Society ESG Imperative was dedicated to this topic, and I would encourage readers to view the content from that day. There is a lot to consider regarding investment, management, and financial reporting that you can utilise to think about how your charity is impacted. You may also consider what you want to say as the momentum grows, for more disclosure in your annual report and accounts.

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