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How bad is the recession for the voluntary sector? Each charity will be affected in its own way, and some will be more resilient than others. But very few will be untouched by the economic downturn, and for some, a perfect financial storm is about to break.
When I blogged on this subject in October I thought the business outlook seemed bad for charities. Less than two months later it looks even worse. Today the Guardian reports on the results of a survey of 362 charities by the Charity Finance Directors Group, the Institute of Fundraising and consultants PriceWaterhouseCoopers.
The survey, Managing in a Downturn (MiD), reveals that charities are already seeing a slump in income (a trend likely to continue) and are experiencing soaring costs - at a time when demand for services is rocketing. The estimated total hit for the sector is around £2.3bn.
Worst off will be those charities that are dependent on fundraising income. The average fundraising charity makes a quarter of its income from legacies and bequests: the bulk of this is from house sales. The collapse of the property market means while the number of legacies are not falling, their value is - potentially by 10% - and the cash is taking longer to be realised, thus squeezing charities' cash flow.
The next biggest income earners are charitable appeals and regular giving, which rely heavily on individual donors. One in five charities, according to the survey, report that direct debits are being cancelled. This market is going to be increasingly competitive in the coming months as charities channel what spare cash they have to invest in marketing and campaigns aimed at persuading hard-pressed ordinary donors and supporters not to abandon their support.
Corporate income is also collapsing. It represents only 6% of charities total fundraised income, but it is hugely symbolic. A third of company giving to the top fundraising charities in 2006-07 came from the banking sector, according to a Caritas Data/Cass Business School report published last week. Any charity with a bank as a major financial supporter, or a high street retailer, or a housing developer, is going to feel the pinch.
Stock market falls will further deplete charity resources, in terms of their own investments and the grants they receive from charitable foundations. It remains to be seen how far the big foundations will dip into reserves to preserve grant levels at a time when their income too has been hit by plunging share prices.
Charities have been aware for some time of the diversion over the next four years of £620m of Big Lottery funding away from the voluntary sector to the Olympics. But few expected to cope with the potential loss of over £250m held by charities in crashed Iceland banks.
Those charities dependent on state funding, many in the field of social care, will not be immune from the downturn. Statutory cash, which accounts for roughly half of all voluntary sector income, is also likely to decline as study of the Treasury's pre-budget review published last week will show. Growth has been slowing in this area in the past four years; now forced cutbacks in local government, and challenging efficiency targets imposed on the NHS will pile more pressure on service delivery charities.
And the consequences for the sector? According to today's survey, the voluntary sector is gearing up for redundancies and recruitment freezes. A small minority of charities which responded to the MiD survey said they were "unsure they will survive the current downturn"; but one in 10 expect to have to consider merger, while 84% will consider collaboration or partnership with another charity.
All of this will be interesting reading for ministers, who are committed to publishing an "action plan" to address the charity sector's financial crisis in the new year – but who have so far ruled out direct financial help for charities.
It is not uniformly bleak for the sector. Religious and faith-based charities so far appear remarkably resilient in the economic downturn, while some sub-sectors popular with the public, such as children's hospices, may continue to hold up well. There's dogged cheeriness in many charities' expectation that rising unemployment will free up more people to become volunteers.
After years of growth it now feels like a market correction is about to take place in the voluntary sector. Stories of closure are likely to become more common. As the MiD report puts it: "All our experience of recessions says they tend to polarise: the strong get stronger and the weak either fail, or lose their identity through enforced merger."
• Patrick Butler the Guardian's head of society, health and education policy
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