For over 25 years, my career has focused on supporting and advising organisations in financial stress, particularly in the charity and not‑for‑profit (NFP) sectors. I’ve worked closely with trustees and management boards as they navigate the often-conflicting demands of the Charities Act and the Insolvency Act. As an approved Interim Manager for the Charity Commission, I am also called in by the regulator when matters go wrong.
One of the first things I assess when reviewing a charity’s financial health is its funding sources. Too often, I hear the same reassurances when I ask about reliance on a single funder — whether government, corporate, or an individual donor:
- “It will never happen — our work is too important.”
- “We’re insulated from funding cuts.”
- “Our main funder is deeply committed and won’t let us fail.”
While this confidence may sometimes be justified, one of the most important duties of trustees is to horizon scan and prepare contingency plans in case circumstances change.
Understanding pressures on funders and donors
Charities must remain alert to the external pressures their funders face. For example:
- Geopolitical shifts: I’ve advised charities affected by the withdrawal of US government aid and delays in funding from large US endowments that are under political pressure at present.
- Economic headwinds: In a challenging economy, corporate CSR (corporate social responsibility) budgets may shrink, and defensive corporate mergers could leave your charity on the “losing side” for continued support.
According to NCVO’s 2025: The Year of the Big Squeeze report (link here):
- UK government funding accounted for 26% of the voluntary sector’s income in 2021/22, down from 30% the previous year.
- Smaller charities (income under £100,000, which make up 80% of the sector) are more dependent on government funding — 37% of their income — compared with 26% for larger organisations.
This means even small shifts in government priorities or the loss of a contract can have a disproportionate impact.
Consumer disposable income and donations
While charitable giving is relatively inelastic, the Joseph Rowntree Foundation projects (link here) that average household disposable income (after housing costs) will decline until at least 2029 —potentially the worst period for living standards on record.
This makes it harder to offset lost institutional funding with individual donations. Many charities I’ve supported have been disappointed by the results of emergency fundraising appeals reflecting donor fatigue.
Responding to delayed funding
Delays in contract renewals can be just as damaging as outright losses. Without prompt corrective action, charities risk:
- Unfunded redundancy costs.
- Erosion of reserves as wages continue to be paid without the full utilisation of staff.
Trustees must set clear deadlines for when cost reductions become unavoidable, balancing the need to retain staff (often the greatest asset as well as the biggest liability) with the need to protect the wider organisation.
Reserves and change strategy
Reserves are a delicate balancing act: too much held back reduces funds available for delivery, but too little leaves the charity exposed.
- Rules of thumb (e.g., three months’ operating costs) are a useful but needs to be tailored to the operating structure of the charity.
- Long‑serving staff, while a strength, can make restructuring prohibitively expensive if reserves are inadequate — as I saw first‑hand at the national charity Relate, leading to an insolvency.
- Asset sales, particularly property, take time. Bridging finance or bank support may be necessary.
Rescue and merger options
If viability is in doubt, trustees should consider partnerships or mergers. The Charity Governance Code (link here) recommends this approach, especially where other organisations are delivering similar purposes more effectively.
Although mergers remain relatively rare in the sector, they can reduce back‑office costs and provide a lifeline when income falls away to enable services to continue.
Conclusion
Trustees must plan for the worst. Resilience requires:
- Contingency plans with clear “break glass in emergency” plans prepared and regularly updated.
- Timetables for action if replacement funding is not secured – delays can be fatal.
- Awareness of pressures and external risks to your donors.
- Realistic assessments of reserves, staffing, and merger opportunities
By preparing now, charities can withstand the shock of losing a main funder and continue delivering their mission when it matters most.
Philip Reynolds is a partner at business advisory firm FRP Advisory. He has over 20 years’ experience working in restructuring for major firms in the UK, the Middle East and south-east Asia, with a focus on the leisure, technology and retail sectors; he also has a keen interest in the charity and not-for-profit sector. If you have any questions for Phil, you can contact him at Phil.Reynolds@frpadvisory.com.