New Study Shows that 17% of Charities are at High Risk of Winding up

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By Ariane Thierry, Law Graduate

In early June 2020, Social Ventures Australia (SVA) alongside the Centre for Social Impact (CSI), published a report (Report) detailing the likely impact of COVID-19 on the charity sector. The report relied on a sample of over 16,000 registered charities’ 2018 Annual Information Statements.[1] The Report presented a rather distressing outlook for these charities in the coming months and years. SVA and CSI modelled that if charities suffered from a 20% drop in revenue due to COVID-19, then 17% of Australian charities would be at high risk of being forced to wind up within the next six months.[2] A 20% loss in revenue for charities could also result in over 200,000 jobs being lost due to closures and cost-cutting efforts by charities.[3] This article will provide a brief overview of some of the key conclusions SVA and CSI drew regarding the impact of COVID-19 on the charity sector.

Prior to COVID-19

The Report noted that prior to COVID-19, charities already worked with tight margins and little reserves to rely upon.[4] Of the 65% of charities that were operating with a surplus, 25% of those charities had a surplus of less than five per cent.[5] Adding this figure to the other 35% of charities that were operating in a deficit, the Report concluded that prior to COVID-19, 60% of charities were already in a precarious financial position.[6]

Surviving, Vulnerable and High Risk Charities in COVID-19

Against this backdrop of the charity sector’s precarious financial position, the Report clearly demonstrates how COVID-19 has already caused significant strain to the financial and operational viability of charities. In April 2020, 85% of charities reported that social distancing laws had affected their capacity to perform their activities.[7] In one survey by the Australian Council of Social Service (ACOSS) of 170 charities in mid-April 2020, 78% had already reported a downturn in revenue due to COVID-19.[8] Another survey by Our Community found that in late April, 35% of charities had already reduced their staff, 8% stated that they planned to do so, with another 40% of charities unsure if they would need to make further reductions.[9]

SVA and CSI used information from its survey of 16,000 charities, in an effort to present the likely ramifications of COVID-19 on the existence and operation of charities. The Report devised three categories of charities:

  1. Surviving charities, which are operating in a surplus;
  2. Vulnerable charities, which are operating in a deficit, and
  3. High risk charities, which do not have sufficient net current assets to cover their deficits for six months.[10]

Unless circumstances change drastically for charities that are categorised as high risk, these charities will be non-viable within the next six months.[11]

Through modelling a scenario where all sources of funding for charities (except for funding from government revenue) dropped by 20%, the Report determined that only 27% of charities would be able to maintain an operating surplus, and 12% would be at a significant risk of non-viability.[12] In the case that government revenue and government grants also fall, the number of non-viable charities would jump to 17%.[13]

JobKeeper and Job Losses

The Report stated that if 80% of charities were seeking JobKeeper payments, as they had experienced a reduction in turnover of 20%, when those JobKeeper payments end, 53% of charities would be at an operating loss, with 9% being at a high risk of becoming non-viable.[14] JobKeeper is only delaying, rather than preventing, the likelihood of charities being forced to wind up or to make part of their workforce redundant.[15]

Even in the event of a smaller income decline of 15%, a study by ACOSS cited in the Report, predicts that 65% of total job losses may still occur.[16] Further, many organisations are already experiencing a loss in volunteer commitment, who in 2014-2015 provided over $12.7 billion in unpaid labour.[17] Evidence from previous recessions suggest that the not-for-profit (NFP) sector does not rebound as quickly as the broader economy, and that the unemployment rate takes a lot longer to fall than it does to rise.[18]

The “October Cliff”

The Report highlighted that an unfortunate temporal convergence of three main factors is likely to place the charity sector in particular jeopardy in October 2020. Dubbed by the Report as an “October cliff”, charities will face incredible financial strain due to the combined effect of:

  • JobKeeper payments ceasing at the end of September;
  • The scheduled end of other crisis supports, such as the Coronavirus Supplement to JobSeeker and deferred loan payments; and
  • “a desire by governments to reduce expenditure” in the upcoming Commonwealth Government Budget[19].

Therefore, the Report suggests that governments create a more gradual approach to weaning charities off JobKeeper by providing alternative mechanisms for financial support.[20]

The full report can be found here.

We are developing a resources package for charities during and post-COVID-19, alongside specialist NFP accountants from Nexia Australia. Please keep an eye out for these resources, along with an upcoming Question and Answer with Vishal Modi and Anita Cohen from Nexia Australia in the coming weeks.

[1] Social Ventures Australia and the Centre for Social Impact, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check, (June 2020) p 7.

[2] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 3.

[3] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 3.

[4] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 3.

[5] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 9.

[6] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 9.

[7] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 12.

[8] Australian Council of Social Service (2020) (Unpublished survey data).

[9] Our Community, COVID-19 Community Sector Impact Survey (April 2020).

[10] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 8.

[11] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 8.

[12] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 16.

[13] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 16.

[14] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) pp 18-19.

[15] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 22.

[16] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 22.

[17] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 22.

[18] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 24.

[19] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 4; p 24.

[20] SVA and CSI, Will Australian Charities be COVID-19 casualties or partners in recovery? A financial health check (2020) p 4.

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