Following the aftermath of Covid-19 we have seen the pressure on the economy and the importance of maintaining adequate property sums insured.
Unfortunately, over recent months we continue to witness rising inflation and it doesn’t seem to be slowing down any time soon.
The Building Cost Information Service that is used to calculate the rebuild cost for British insurers, shows the average increase of 17.9% from June to August 2022.
Alongside this, the Retail Price Index (CPI), measuring the changes in cost of retail products shows an annual increase of 12.3%.
Importantly the insurance market and Folgate continuously monitor the ongoing increase to inflationary factors, they do so by adjusting index linking rates to support policyholders to maintain the correct sums insured.
These factors can affect charities in three main ways;
- Rising Costs (particularly for staff/volunteers)
- Depreciating Income
- Beneficiaries’ Finances (due to change in demand levels)
Rising Costs
With costs rising to record highs for goods and services provided by charities and non-profit organisations, this will impact what can be delivered to the community and members.
The main issue that social enterprises, charities and non-profit organisations are facing is the increases required to wages and salaries to attempt to counteract the extreme rate of inflation. For staff members to be supported through this increase organisations will need to increase wages by around 8.8% which can and will make a huge hit to many charities and the like across the board.
Research has found that many charities and non-profit organisations will not have the ability to keep up with this, meaning that many third sector workers will continue to earn low wages.
As a direct result of this and salaries reducing or not increasing to counteract rising costs it is likely that many will be forced to leave the sector for a better paid alternative. This will then affect the charities, non-profit organisations and social enterprises in question who will inevitably be faced with low staff numbers and the battle of replacing staff considering the low wages they are financially able to offer.
It is important for charities and the like to actively prepare their intentions in this matter and initiate negotiations as early as possible. There is also a responsibility to understand that many staff members may already be struggling, and this could be a difficult conversation to have.
Depreciating Income
As many will already understand, while costs continue to rise, the income if charities will feel the strain to keep up.
The cost-of-living squeeze resulting from inflation may also affect the level of charitable donations received. If the ongoing issued continue to charities are likely to see a reduction in their income, as consumption is likely to fall over the coming months of uncertainty and high inflation.
There are three prominent areas of charity income that are vulnerable to being substantially affected by inflation.
Firstly, there are donations which have been anchored, such as those anchored in time like historic direct debits, where individuals have a set amount they wish to donate. This set amount is unlikely to change with inflation. Taking the most common gift amount of £20. It is forecasted that the real value of a donation of £20 made in 2020 will have fallen to £17.20 by 2026, a reduction of 14%.
Therefore, it is important for charities, non-profit organisations, social enterprises and the like to discuss the levels of giving with their donors, especially those on direct debit.
Secondly, grants which are awarded to non-profit organisations are likely to significantly devalue in 2023. If an organisation is awarded a grant of £100,000 per year in 2021 for the next three years, the 2023 grant would be worth £94,000 after accounting for inflation, a reduction of 6%. Charities applying for grants and those responsible for budgeting around them will need to take this into consideration when making financial decisions.
Finally, the sector as a whole is a net saver, not a borrower. With high rates of inflation, any savings held are at risk of losing value. Interest rates remain incredibly low and are due to continue falling. Tracking this into account, further discussions around investment strategies should be taken to elevate the risk of it losing its value.
Decrease in demand
Many low-income households are already under an increased amount of pressure due to the rise in living costs, consequently pushing the demand for charities to support those living in poverty.
The vulnerable will likely be the hardest hit by the rise in inflation, such as elderly, low income and those needing additional support. The government has announced that benefits will rise by 3.1% which on the outside looks like a fair increase until you look at the expected increase in good will rise to around 5.5%.
Considering the gap between the cost of living and the uprating of universal credit, it is estimated that 100,000 individuals will be pulled deeper into poverty if inflation rates hit the high expected over the coming months.
This is likely to drive up the demand for many charities’ services. The rising demand won’t be restricted to foodbanks but will be felt by the many thousands of other charities supporting those on low incomes in various ways.
The rise in cost of living is also likely to affect charities such as museums, exhibitions and theatres. Inflation may cause a drop in footfall for these kinds of charities, as consumers have less income to purchase tickets meaning a huge loss in revenue.
What to do
As the higher rates of inflation discussed above are expected to continue until at least 2021, it is important for non profit organisations, social enterprises and charities to add higher costings to financial planning in the hopes to counteract the rates of inflation and potential loss.
The main points to take away from this are:
- Determine if the demand for the services is likely to change and plan for it.
- Enter wage negotiations early and appreciate many are likely to be struggling.
- Revise income targets and plan how to deliver them in the context of inflation.
To navigate all three of these, having the best understanding possible of the trends we’re seeing in the economy is key. There will be many outlets to keep charities up to date with the information they need. Most importantly ensure your organisation keeps informed and plans for the worst.
