The likely impact of the cost of living crisis in the United Kingdom on charities and social enterprises and what they can do about it

By Marcus Coetzee, 26 September 2022

The ‘cost of living crisis’ refers to the rapid inflation of core essential goods and services that constitute a sizable proportion of household budgets in the UK. Its impact will be especially severe among low-income households who tend to rely on benefits. These households are likely to experience greater debt and poverty. The government is scrambling to limit the fallout. The cost of living crisis has afflicted the UK since late 2021 but has recently gained more media attention as its consequences become evident.

This article focuses on the likely consequences of this crisis for charities and social enterprises. It also suggests six sets of tactics that organisations might use to survive this crisis, become more resilient and increase their impact. 

A. Perfect storm 

It looks like a perfect storm is on the horizon – possibly as great as the Covid pandemic which was catastrophic to many poor and vulnerable households. Organisations must not underestimate the downstream impacts of this crisis and do too little to mitigate its effects. As someone who has lived and worked in developing countries, the causes and consequences of poverty are sadly familiar. Poverty is likely to increase unless the UK uses its considerable expertise and resources to arrest this decline. It is always easier and cheaper to fix problems upstream than to wait for an array of negative consequences to manifest.

This crisis is driven by a multitude of interrelated factors including the labour shortage and trade issues created by Brexit, the war in Ukraine, profiteering by international energy companies, the devaluation of the Pound, trade imbalance, printing more money during Covid, supply chain problems created by the Covid lockdowns and rapid increase in global demand, and the high reliance on gas to generate electricity for the national grid and to keep households warm. Changes in the UK’s social-security policies, such as the reduction in Universal Credit in October 2021, have also contributed to this crisis. 

B. Lots of good content but little strategic advice

There are many good articles and guides on the cost of living crisis and its likely consequences. There are also several articles and webinars on where charities can seek support. For example, there is a well-researched guide by New Philanthropy Capital (NPC) on the nature of this crisis, how it will affect organisations and what grant funders can do to help. The Scottish Council for Voluntary Organisations (SCVO) also has some useful resources on this subject.

However, too little is written on how charities and social enterprises should adapt and revise their strategies so that they can survive and continue with their good work. This article will address this topic.

C. The likely impact on charities and social enterprises 

Below are four main sets of impacts that these organisations should consider when planning for the next 12 months. These impacts will be especially acute during the 2022/2023 winter before the government and third sector have had time to orient themselves. These impacts are grouped as follows: i) increased demand for their goods and services; ii) increase in overheads and other input costs; iv) reduction or change in their income; and iv) difficulty retaining staff and volunteers. There are doubtless other impacts than those mentioned in this article. 

Organisations themselves will be the best judge of their vulnerability to these forces. CEOs and trustees must update their financial models as they consider future scenarios. This will inform their contingency plans.

Impact 1 – Increased demand for food banks and other social services

The activity of food banks is a good indicator of the pressures facing poorer households. Unfortunately, food banks have recently seen an increase in demand, despite the end of strict Covid lockdowns and the high employment rate. For example, the Independent Food Aid Network confirmed that approximately 90% of its 550 member organisations have experienced increased demand since April 2022. This suggests that the minimum wage and social security system is insufficient to support vulnerable households. 

The cost of living crisis will force millions of people into an ugly dilemma of food versus warmth, and sadly some households will have neither. There is also a risk that food banks run out of food and must reduce the size of their parcels or turn people away. 

Vulnerable households are already shifting their habits in preparation for this winter. For example, the Food Train recently surveyed 308 of its elderly beneficiaries and found that over a quarter (27%) had already started to buy less food and the majority (61%) intended to heat their homes less than previously. 

In addition to the increased demand for food support, those charities that work in the fields such as mental health, homelessness, domestic violence, and substance abuse are also likely to be much busier since poverty is never an isolated phenomenon. For example, an open letter from 17 mental health charities to the prime minister explained how their counselling lines have seen a massive increase in calls relating to people’s financial situations. The letter cited the Samaritans who received about 12,000 calls in July 2022 that dealt with these subjects. This statistic is likely to increase.

Councils and charities have considered creating ‘warm banks’ (warm spaces) in public buildings. It seems absurd that things have reached this point in a wealthy country where there is no war going on. I have also heard several remote workers say that they are considering returning to their offices this winter to stay warm and save costs.

Impact 2 – Increase in overheads and other input costs

The cost of debt is likely to increase as the central bank raises interest rates to try and calm the inflation rate that was 10.1% in July 2022. This Bank of England base rate for interest recently increased to 2.25% on 22 September 2022 and might increase up to over 4% during 2023. This will increase the cost of finance for assets such as homes and vehicles. It will also increase the cost of loans for working capital – money borrowed by organisations to help cover the costs of day-to-day operations during a crisis or growth phase. 

The cost of overheads such as electricity, gas and transport have also increased significantly since last year. For example, Ofgem, the government regulator for electricity and downstream gas prices, recently announced that the price cap on the energy bill of a typical household will increase from the current £1,971 to £3,549 from the beginning of October 2022. Ofgem has hinted at further increases in early 2023. Following a national outcry, Prime Minister Liz Truss mentioned that the government will cap household energy bills at £2,500. The government also said that it will subsidise the energy bills of businesses and charities for the six-month period between October 2022 to March 2023 as part of the Energy Bill Relief Scheme. This help will be welcome since those organisations that have physical office spaces have seen exponential increases in their energy bills thus far, which have threatened their viability.

Charities that rely on food as a key input will be impacted by rising costs. Such organisations range from food banks and school feeding programmes to cafes run by social enterprises. The Office of National Statistics calculated that the inflation rate for food and non-alcoholic beverages had risen to 12.7% in July 2022. The increased cost of food will also present vulnerable households with some difficult choices.

Impact 3 – Reduction or change in income 

The income of charities and social enterprises tends to consist of a mixture of grants, donations, revenue, and investment income. 

The cost of living crisis seems likely to have inconsistent effects on the income of these organisations depending on their sectors, business models and income streams.

It is difficult to predict the impact of this crisis on donations. This will depend on the type of work that an organisation is doing, the profile of its donors and its quality of engagement with them. A recent survey by the Charities Aid Foundation (CAF) found that 14% of respondents intended to cut down on donations during the upcoming months. However, the value of donations is unevenly distributed since a small proportion of donors tend to give large amounts, so it is difficult to draw conclusions from this statistic. 

The Economics Observatory studied donation trends during recessions. It found that there has been a steady decrease since 2010 in both donations and the number of donors. However, fewer wealthy donors (sometimes with their own foundations) have tended to increase their donations during such periods thereby keeping overall donations steady even when GDPs have temporarily declined.

The Charities Aid Foundation (CAF) conducted a large study on donations in the UK. It had a sample of 22,000 respondents and took place between 2019 to 2021. The findings confirmed the trend for overall donations to remain consistent even when there is a reduction in the number of donors. CAF even found that the total value of donations increased temporarily during the Covid pandemic, possibly because people became more aware of the struggles of others and wanted to help.

A mixed impact is also likely to revenue from social enterprise activities. Organisations earn revenue when they sell goods and services to their customers. If these products meet a gap in the market and serve the vulnerable, then it is likely that their revenue will remain consistent and possibly even increase. This might be the case for social enterprises that sell low-cost meals, run community transport services, or operate charity shops. 

However, this may not be the case for organisations in sectors such as eco-tourism, conservation, and the arts and culture sector. The mixed impact of the cost of living crisis on incomes is supported by the findings from Social Enterprise UK’s Barometer survey of its members in July 2022. It found that while one-third (33%) of the surveyed organisations have experienced increased demand, a fifth (22%) have experienced the opposite as their beneficiaries have been no longer able to afford their services.

This survey also investigated how social enterprises are responding to the cost of living crisis. Approximately one-third (31%) have chosen to increase their staff pay, about a quarter (27%) have increased their prices and about one-in-seven (13%) have changed their operating model. 

Grants from funders seem likely to continue and even increase in certain areas. The research suggests that the overall priorities of grant funders tend to stay consistent during a crisis or recession though they might make emergency funds available. Grant funders are mindful that the core costs of charities are increasing and that charities need to pay a living wage. Therefore they are likely to be open to negotiation about how to spend these budgets. Presumably, grant funders are also mindful that most charities can only do damage control and that the long-term solution relies on effective advocacy campaigns and refinement of government policies.

There is likely to be a change in emphasis overall in the pattern of income of organisations in the third sector. Those that provide welfare and other social services are likely to experience an increase in both their income and demand for their work as they take on an expanded role. This was the case during the initial Covid lockdowns. However, it is unclear how long this bump in funding will continue. Sadly, the cost of living crisis is likely to negatively affect the incomes of those organisations from other sectors unless they are able to innovate and adapt accordingly.

Impact 4 – Difficulty retaining staff and volunteers given payroll budget and burnout

Earlier this year in June, I attended a leadership workshop facilitated by the Cranfield Trust at the Gathering – the annual conference of the Scottish Council for Voluntary Organisations (SCVO). All the charities in the room described how their number one leadership problem was finding suitable staff. They complained that people were still exhausted from the pandemic and/or had shifted to higher-paying jobs in the public and private sectors. The charities speculated that this enabled these people to regenerate and regain some financial stability. 

The Office for National Statistics reported that the unemployment rate in the UK was 3.6% in the period May/July 2022, thus confirming this anecdotal evidence. This shortage of staff is a serious and valid concern for charities and social enterprises in the UK that have been struggling to find and retain staff.

There are three main reasons for this problem.  

The first reason is Brexit which has made it more difficult for people in Europe to work for UK charities. There are too many obstacles to getting the appropriate visas. This decreased the available pool of employees. I have had first-hand experience with the great difficulty and costs involved in emigrating to the UK.

The second reason is the comparatively lower salaries paid by charities compared with the private sector. A study by Pro Bono Economics found that staff in charities are paid 7% less on average than their counterparts in the private sector and that their average annual salary increases in the period ended May 2022 were 3.8% compared to 5.6% for businesses. These statistics suggest a worrying divergence in the salaries between sectors. This trend becomes more significant as third-sector staff struggle to cope with the increases in their own living costs.

The third reason is that staff are burned out from working in overdrive during the Covid pandemic, so they moved to other sectors to regenerate and stabilise their financial situations. This fits the observation that the charities at the SCVO conference had made. The ‘Great Resignation’ trend in 2021 also affected the third sector as people resigned en masse to choose jobs with more flexible working conditions. 

Volunteers are under similar pressures to employees. For example, charities have a valid concern about the Approved Mileage Allowance Payment (AMAP) of 45p per mile for staff and volunteers who use their own vehicles. The government last updated this rate in 2012 and the cost of transport has risen considerably since then. With the recent fuel increases, this means that volunteers with their own vehicles might be inadvertently subsidising the charities where they work. Furthermore, it is likely that many volunteers will have to reduce their hours so that they can try and increase their incomes as their own costs increase. 

But on the other hand, the incidence of volunteering does seem to increase during a crisis as people choose to come together to help each other. Volunteering is also greatly beneficial for the volunteers themselves who gain things like companionship, skills and a sense of meaning from well-run volunteer programmes. 

D. How might these organisations respond to this crisis?

The Covid pandemic impacted charities, their staff and volunteers, and their beneficiaries. Furthermore, many organisations have used up their financial reserves. These factors appear to poorly position the third sector to respond to the cost of living crisis. 

However, these events also helped to prepare charities and social enterprises to deal with national crises such as the one on the horizon. This capability is a tremendous asset which will become increasingly useful in a turbulent world where organisations must become even more resilient and adaptable to survive.

Below are six sets of tactics that can help organisations to achieve this.

Tactic 1 – Investigate how your organisation can maintain and even increase its income

In addition to refining your business development, fundraising, and marketing activities, there are some other things that your organisation can do to strengthen its income.

A. Investigate what emergency funds are available since a multitude of grant funders have allocated funds for this purpose. Grant funders are very aware of this crisis and have been trying to make additional funding available to charities and social enterprises. These funds will tend to be specific to your sector or region.

B. Strive to increase grants and donations from existing grant funders and communities of donors. Present a clear case for how your costs have increased and how the demand for your organisation has shifted. Motivate for the precise amount of additional income that you need to meet the anticipated demand and/or sustain operations. Be mindful that your community of donors are likely to be under considerable financial pressure themselves and that some will be forced to reduce their donations.

C. Negotiate more favourable terms of how to use existing grant funding. In other words, try to reduce the proportion of grants that are restricted in how you can spend them. Overhead restrictions tend to do more harm than good. Grant funders must learn to trust that well-governed charities have a good understanding of how to best utilise their funding. 

C. Explore whether it is possible to increase your revenue by introducing social enterprise elements into your organisation. This is the name given to the income that you earn from selling goods and services to your customers. The feasibility of this approach will depend on the nature of your customers. Revenue can be a valuable source of unrestricted income.

D. Consider alternative forms of finance such as loans, community shares and revenue sharing to provide extra money. These are not forms of income that belong in an income statement. Rather they involve borrowing money or selling part of your organisation or rights to a proportion of future income streams. When your organisation does not have sufficient savings of its own, then finance can be an effective method of getting money into your organisation. Investors can provide the funds to scale up your organisation, improve its infrastructure, and get through some tough times. This tactic will suit organisations with reliable and/or promising revenue streams. 

E. Communicate in a way that strengthens the brand of your organisation. Nowadays people want to see evidence of genuine impact. Organisations often overlook the importance of communications and public relations in their scramble to raise funds. A good brand is a magnet for opportunity and something that makes fundraising much easier.

F. Consider submitting joint proposals in collaboration with similar or complementary organisations. Networking with other organisations is a reliable method of finding suitable partners for a collaborative funding proposal. Grant funders tend to like it when organisations work closely together on complex problems that require collaborative solutions. This will be the case for this cost-of-living crisis.

Tactic 2 – Investigate how to improve your cost structure

Cost structure refers to the cost components that make up the unique business model of an organization. These are the types of costs, their relative proportions, and whether they are fixed costs or variable costs.

A. Conduct a thorough review of your organisation’s expenses and update your budget and cash flow projections to incorporate inflation and changes in demand. This exercise should give you an accurate picture of what is likely to happen and how your organisation should respond. The Charity Excellent Framework has developed a useful guide that describes 20 ways that your organisation might be able to reduce its costs. 

B. Consider the feasibility of shifting fixed costs into variable costs to create a leaner cost structure that is more able to expand and contract as circumstances require. This is always a tricky issue as sometimes organisations can reduce costs by bringing variable costs in-house (but then one’s organisation tends to become less flexible).

C. Use some of your organisation’s financial reserves if these exist. Some charities have been fortunate to accumulate financial reserves that will cover operating costs for six months, sometimes even a year or more. In addition to providing funds to invest in future opportunities, these reserves are for emergencies, and this winter is likely to be one of them. 

D. Investigate how to replace costs with free or discounted services, including consulting support. Free services or discounted services are frequently available to charities, either from other charities or from businesses as part of their pro-bono contributions. For example, the National Pro Bono Centre provides free legal advice to charities and Community Enterprise provides consultancy support to Scottish charities and community groups through its government-funded Accelerate programme. There are no doubt equivalents throughout the UK.

E. Assess whether your organisation will need to prioritise certain goods or services in order to maximise their impact. Another organisation might be more capable of doing some of what your organisation has been doing. The Pareto Principle (‘80/20 rule’) would suggest that 80% of your organisation’s impact is likely to come from 20% of its activities so investigate if any services need pruning. The Pumpkin Plan is a good approach for those organisations that want to implement a laser-focused strategy. 

F. Consider gracefully winding up your organisation or merging with/into another as a last resort, if it looks like your organisation is going to become a causality of the cost of living crisis. This is sometimes a sad but necessary process. The Scottish Council for Voluntary Organisations (SCVO) has a useful guide on mergers and collaborations with some links to resources. It is an important skill for boards and leaders to learn how to make necessary endings whether these decisions are required to streamline organisations, pivot them strategically or wind them down.

Tactic 3 – Collaborate more closely with organisations that provide complementary services and improve your referral networks

Systemic crises require a diverse range of organisations to cooperate to overcome the problems they cause. Here are three things that your organisation might consider doing if it is not already doing so.

A. Identify and collaborate more closely with the organisations that tackle different aspects of the problem that your charity is focused on trying to solve. 

For example, the Big Issue cites research by the Combined Homelessness and Information Network (Chain) that found 8,329 people sleeping on the streets in London between April 2021 to March 2022. Preventing and solving this problem requires an array of organisations to collaborate with each other. These are likely to include drop-in centres, overnight shelters, bridging housing and soup kitchens. It will also require organisations that provide substance rehabilitation, trauma counselling, employability or entrepreneurship support, legal services, advocacy and access to social grants. 

The Glasgow City Council has recognised the complexity of this problem and established the Glasgow Alliance to End Homelessness to foster cooperation. This same principle is likely to apply to other organisations that are working to reduce poverty which is inherently a wicked problem.

B. Improve referral protocols with the organisations/departments that your organisation gets referrals from and refers people to. For example, referrals from welfare-focused charities to food banks are likely to increase, as will referrals to organisations that support people with poor mental health. It is worthwhile to think about how to improve these referral channels and the method for briefing and following up with the other party, without jeopardising GDPR compliance. 

C. Consider whether it is appropriate to team up more closely and share a level of overheads with organisations that have similar or complementary missions. A typical example might be letting go of your offices and moving into a shared workspace or the office of a complimentary third-sector organisation. Some organisations might even go a step further and merge with another as was suggested earlier

Tactic 4 – Continue to innovate and explore cost-effective methods of delivering your services

Social innovation involves finding new and creative ways of dealing with social and environmental problems. Over the past decades, I have witnessed several sectors radically overhaul their approach to delivering services in a more cost-effective manner. Here are two tips to consider.

A. Explore how charities and social enterprises address your targeted problem in developing countries since they can be a source of great inspiration. Organisations in developing countries such as those in Africa have never had the luxury of the relative abundance of resources that has existed in the UK. They are also well versed in operating in an unstable and ambiguous environment.

Furthermore, because of the massive skills shortage in developing countries, their inhabitants tend to become more versatile and develop broader skill sets. This helps them to break free of ‘déformation professionnelle’ which is a cognitive bias caused by over-specialisation in one’s profession. This enables leaders to see novel ways of fixing problems. Consequently, these organisations have become very capable of dealing with massive demand and uncertainty while having minimal resources.

For example, in the recent 2021/2022 financial year, FoodForward SA in South Africa reported that it “distributed 48 million meals and reached 875,725 people daily through a network of 2,225 beneficiary organisations, across South Africa…at a cost per meal of only R0.68 (~£0.034 per meal), due to the tremendous support from our donors, partners and volunteers.” This organisation does excellent work and demonstrates how a few resources used wisely can go very far.

B. Investigate whether it is possible to use technology more effectively given the shortage and price of labour in the UK. There is a range of affordable technology in the UK that can be used to automate processes, track data, and manage interactions with customers, beneficiaries, and grant funders. If this is not something that you’ve looked into, then perhaps this would be a good time to start.

Tactic 5 – Look after your most precious assets – your staff and volunteers

This article has already mentioned how front-line staff and volunteers are likely to still be under strain and insufficiently recovered from the pandemic. Furthermore, they are likely to be tempted by the lucrative salaries and job stability offered by the private and public sectors. 

A. The most important thing that you can do is to lead well and create a constructive organisational culture. Pay attention to staff and their ambitions and genuinely invest in learning about them and helping them to move forward. There are four outcomes that leaders should strive to achieve in their teams. These are when their team members, subordinates and followers: a) are crystal clear of the leader’s intention and the rules of engagement; b) feel encouraged, appreciated and connected; c) have the tools, resources, and skills they need; and d) have enough power to make the decisions they require.

B. Consider whether it is possible to provide your staff with more flexible working arrangements. This might be flexible hours or even an increase/decrease in the hours that they work each week. The National Council for Voluntary Organisations (NCVO) in England has shared a detailed and useful guide on how this might be done. Also, remember that virtual organisations and remote working require more than technology to succeed. 

C. Commit to paying a ‘living income’. The Living Wage Foundation recommends that employers pay staff a minimum of £10.90 across the UK and £11.95 in London for the period from 22 September 2022 as living costs have recently increased. Over 11,000 employers are committed to paying this minimum wage rather than the official UK rate of 9.18/hour. While volunteers can’t be paid, they can nevertheless be reimbursed for travel, food, drink and equipment that they require in their work.

D. Consider the dilemma of how best to use your existing payroll budget and whether it’s better to have a smaller well-paid team or whether to spread this budget between a larger team. Furthermore, if there is extra budget to distribute to staff, consider giving out the same nominal lump sum or salary increase as this disproportionately benefits the lower-paid staff who tend to need the money the most.

E. Assess the additional costs that employees are likely to incur from working at home. These costs are most likely associated with increased gas and electricity prices. It might be viable to provide an additional allowance to help pay these costs since it is their office environment. For example, the HMRC permits employers to pay their employees a tax-free home-working allowance of £26 per month or to reimburse actual costs if these are identifiable. 

F. Remember to support and engage your volunteers. As one of my colleagues always reminds me, volunteers are the second area of impact for charities and social enterprises. She often says that volunteers are not free labour; it takes considerable time and effort to use volunteers effectively and fulfil their reasons for volunteering. Therefore speak with your volunteers and figure out how you can better support them and show your appreciation.

Tactic 6 – Continue to advocate for an appropriate response from the government, grant funders and the private sector

This cost of living crisis was not created by the third sector nor by its beneficiaries. Rather these organisations are trying to mitigate this crisis. This crisis must be dealt with at a government level through sensible strategies and policies so this is what the third sector must advocate for.

A. Raise awareness of the cost-of-living crisis and its impact on the vulnerable. The charity sector is doing a remarkable job at this, and it has led to some policy shifts already.

B. Advocate for appropriate improvements to the social security system at a UK level. The National Council for Voluntary Organisations (NCVO) coordinated a joint statement by 45 umbrella bodies that represent tens of thousands of charities across the UK. They called upon the government to provide direct and immediate support to vulnerable households. They reminded the government that frontline charities are part of this social security system and should gain the support they deserve. They also recommended that charities are included in any plans to provide support to businesses – a sentiment that seems to be gaining traction given the Energy Bill Relief Scheme which was mentioned earlier.

C. Engage with local authorities and ensure that they are making the best decision possible under the circumstances with their restricted budgets. Local authorities are also likely to have some tough decisions since their costs are likely to increase, as well as the demand from their beneficiaries. They will have to decide how to balance their budgets. For example, the County Councils Network, which represents the 36 largest councils in England, explained in June 2022 that inflation has already increased the costs of councils in England by £1.5 billion per year and that some very difficult decisions are on the horizon about which programmes to cut back.

E. Conclusion

Leaders in the third sector must overcome the cognitive bias that things will remain much as they have before. Then they must also be willing to confront the ‘brutal truth’ of the challenges that their organisations and beneficiaries are likely to experience. But at the same time, they must never relinquish hope that a better future can be achieved otherwise they will succumb to despair. This is the Stockdale Paradox. Fortunately, leaders in the third sector have gained recent experience in reconciling this paradox.  

Phenomena such as the cost of living crisis, high inflation and interest rates, and economic uncertainty are commonplace in developing countries such as those in Africa, Latin America and South East Asia. It is a reasonable expectation that a wealthy country like the UK (with its considerable resources and highly educated citizens) should have the means to anticipate and mitigate such events rather than follow a similar path.

In light of current events, charities and social enterprises have only one set of choices – they must continue to advocate for change while moving forward steadily themselves and becoming more adaptable, capable and impactful. They might even learn some lessons from similar organisations in developing countries. This crisis presents organisations with significant opportunities to overhaul their approach and increase their impact.

In pursuit of strategic clarity

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