In a challenging funding environment, charities of all sizes are facing increased financial uncertainty. Reductions in public funding, greater competition for grants and rising demand for services are placing growing pressure on financial sustainability.
In this blog, Johnathan Dight, Associate Director at Bevan Buckland, considers how funding pressures, income diversification and recent accounting changes under FRS 102 are affecting charities, and highlights the key issues trustees and finance teams should be keeping under review.
Funding cuts and going concern pressures
For many charities, funding uncertainty has become the norm. Grant income is often short-term, restricted in its use and increasingly competitive. At the same time, many organisations are experiencing sustained or growing demand for their services, stretching already limited resources.
These pressures have brought going concern firmly into focus. Trustees are expected to actively assess matters such as:
- The level and availability of reserves
- Dependence on key funders or income sources
- The impact of funding reductions on services
- The charity’s ability to adapt if income falls
Going concern assessments are now subject to greater scrutiny from auditors, funders, and regulators and require clear documentation and explanation.
Pressure on service delivery and reserves
When funding reduces or becomes more restricted, charities are often faced with difficult operational decisions. Core services may not be fully funded, overhead costs may not be recoverable from grants, and unrestricted reserves can quickly be eroded.
From a financial reporting perspective, this pressure is commonly reflected through:
- Deficits on unrestricted funds
- Increased reliance on reserves to support day‑to‑day operations
- More detailed disclosure of risks and uncertainties in the trustees’ report
Clear and balanced narrative reporting is essential to explain how trustees are managing financial pressures while continuing to deliver charitable objectives.
Diversifying income: resilience with added complexity
To manage funding uncertainty, many charities are diversifying income through activities such as:
- Trading and social enterprise activity
- Membership schemes or subscriptions
- Venue hire or property income
- Corporate partnerships and sponsorship
- Fundraising events and online campaigns
Income diversification can improve long‑term resilience, but it also brings additional financial, regulatory and governance considerations that trustees need to understand and manage effectively.
As income streams diversify, financial reporting often becomes more judgement‑heavy. Different income sources can have very different accounting treatments, particularly under the updated five‑step income recognition model in FRS 102. This makes clear accounting policies and consistent application increasingly important.
Planning ahead in a changing environment
Taken together, funding pressures, income diversification and accounting change underline the need for forward‑looking financial planning.
Charities should take time to consider:
- Whether diversified income streams are genuinely sustainable over the medium to long term, and whether they remain compliant with charity law, governing documents and any relevant regulatory requirements.
- The true cost, risk and resource implications of trading and fundraising activities, including exposure to financial loss, reputational risk and the demands placed on staff and volunteers.
- Whether existing accounting policies remain appropriate as activities evolve, particularly where new income streams introduce additional judgement under FRS 102.
- How financial uncertainty, key risks and mitigation plans are communicated clearly and transparently to stakeholders, including funders, members, beneficiaries and regulators.
Early advice and careful planning can help prevent emerging issues from becoming urgent problems.
Final thoughts
Charities are being asked to do more in an increasingly complex financial and regulatory environment. Funding pressures are forcing difficult decisions as companies diversify. Although often necessary, it introduces new risks and responsibilities.
A clear understanding of the financial, tax and accounting implications of these choices is essential to protecting charitable assets and supporting long‑term sustainability.
If you would like to discuss income diversification, funding risk or the impact of recent accounting changes, our specialist charity team would welcome the opportunity to help. You can contact us by emailing mail@bevanbuckland.co.uk or by calling 01792 410100.
