It is no overstatement to say that the charity sector has been moving deeper into crisis over the past four years.
A growing number of charities, both small independents and major national organisations have closed their doors, with more than 4,000 charities being removed from the Charity Commission register in 2023 alone. This continues a pattern of closures driven by financial challenges such as increased demand for services, rising operational costs, and reduced donations.
Indeed, the latest casualty that shocked the not-for-profit world was the news that Relate, the central arm of one of the UK’s biggest counselling charities that has been a backbone of the industry for nearly a century, recently entered administration.
This huge and worrying trend has been driven in no small part by the lack of funding available at a local authority level, as well as the rising cost-of-living crisis. And these effects are even more pronounced for the estimated 96% of organisations classified as small charities, who can live or die on the awarding of these contracts.
The real-terms funding gaps that result from increased service needs and lower general funding are unlikely to be solved anytime soon either. Central government funding has fallen by 33% from 2021-22, although this did include some artificially inflated funding levels resulting from emergency approaches during the pandemic.
This is being compounded by a huge surge in the number of grant applications, which is even forcing some foundations such as the City Bridge Foundation and the Schroder Charity Trust to halt their grant activity altogether.
And if all of that wasn’t enough, charity leaders are now having to tackle the impact from the budget, which has ripped a new hole in their finances to the tune of a national living wage increase of 6.7% and a rise in employer national insurance contributions to 15%.
With this growing pressure, and no government-backed relief on the horizon, it’s no surprise that charities are having to look elsewhere for funding.
A different source of income
One route that is becoming more and more promising for charities, especially those that have a unique or rare specialism, is the creation of financially independent commercial subsidiaries. At TLC: Talk, Listen Change, we launched our counselling and psychotherapy subsidiary, Now You’re Talking Therapy, in April to build on our 40 years’ experience as a charity supporting people in complex situations.
Charities are often uniquely placed in the world of business. Their areas of focus are often either untapped or have little competition; for example, charities that specialise in victim support may only be competing with just a few specialised commercial therapy and support providers. Their team members and specialists are often exceptionally experienced, and have a proven track record of successful support. Their processes and procedures are built to operate with minimal overheads, with lean processes a core part of charitable business models.
All of these factors actually result in charities having a set of competitive advantages that they can leverage commercially - creating an ownable and potentially potent funding stream that’s able to stand on its own two feet.
These profit-for-purpose subsidiaries can also be marketed in a way that can give commercial advantages too. With a huge number of major corporations that have strict social responsibility requirements, and the increasing number of B-Corps that want to invest with “good” business partnerships, a charity’s subsidiary that is designed to reinvest profits into the main charitable body becomes a highly attractive partner when compared to a purely commercial operation.
Steps to take
For any charities that are looking to move toward this as a funding route, there are a few important starting steps to take.
Firstly, it pays to do some market analysis. As an organisation, you have some inherent benefits that other commercial operations don't have, but you are also likely to be less efficient at competitor analysis and market research, meaning that you’ll have knowledge gaps to fill.
Plug these by hiring right. When we launched our commercial subsidiary, we opted to bring in a commercially experienced leader with considerable experience across multiple sectors; this gave us the perfect blend of commerciality and charity experience that could best leverage our competitive advantage.
In my opinion, the use of trading or commercial subsidiaries should be considered as part of a diverse income mix for charities. We’re looking at funding shortfalls that would have sent people into shock 20 years ago, and ones that sadly reflect the new reality; that third sector activity has to find a way to be self-sustainable so that we can help the millions of people in the UK that rely on us to be there for them every day.
