Tough times and difficult decisions ahead

In the ever-growing cost-of-living crisis, think-tank NPC suggest charities and social enterprises will need to make crucial decisions about their income, expenditure, and strategy if they are to meet the needs of the people they serve. Our work with small and medium sized organisations suggests this is increasingly the case for those supporting mental health issues.

We are seeing widespread reports of increasing demand for services among our Members, unsurprising given the well documented relationship between financial difficulties and mental health. This is heightened for Providers supporting communities with high deprivation as lower-income families are facing higher than average inflation increases, and the most severe cost pressures. In turn we know that rates of depression, serious mental illness, and suicide worsen with increased poverty and deprivation in a very clear dose-response relationship – the more the exposure, the worse the outcomes.

Secondly, organisations in the Mental Health sector are, alongside other social sector colleagues, starting to share with us the (intensified) financial constraints caused by inflation such as increasing operational costs and eroding the value of reserves, donations, grants and contracts. So overall, a double whammy of bigger demand for their services yet increasingly difficult to deliver.

Although we at The Association can’t offer solutions to the above, we’re keen to share some recent analysis which helps to set the scene in terms of smaller Providers in the Mental Health sector and their financial situations. It is hoped this will be useful for those working with and funding such Providers. The analysis has been completed by financial benchmarking specialists, MyCake, with the findings further consolidating the experiences of Providers described above, and it highlights the likely fragility of the sector going forward.  The analysis involved an in-depth assessment of over 100 SME Mental Health providers, assessing income, expenditure and margins. It uses data from 2019/2020 filed Accounts and therefore is important to note that this provides insight into organisations pre-pandemic. However, it is felt this still provides an important snapshot of our community’s financial ‘make-up’ to consider what might be the impact of the current cost-of-living crisis on organisations and the communities they support. Although this analysis does not provide any guaranteed conclusions, it provides useful insight to help prioritise further research and analysis and also inform funders / commissioners working with Mental Health providers.

Workforce

A first big takeaway from this exercise was the confirmed importance of workforce costs. It showed salary costs, as a median across all reviewed organisations, account for 63% of all costs. And it is highly suspected that if costs of individuals working in a freelance / contractor capacity could be more easily accessed then a figure attributed to the ‘workforce’ would be close to 80 – 85%.  This high proportion isn’t surprising given the nature of the Mental health sector and the work it does and re-emphasises the value of staff as an organisational asset and their crucial role in delivery of services.

But it is also a reminder that the ‘workforce’ needs constant and close attention from a cost perspective, and this is even more pertinent during current times. On one hand there is consideration of what support mechanisms and benefits can be put in place to support staff wellbeing, which all come at a cost. But arguably such things can only go so far. On the other hand there is a pay-rise versus staff turnover cost dilemma. Organisations across all sectors are needing to consider staff pay-rises to combat challenges and costs of recruitment. But social sector organisations are comparatively even more open to these challenges given the potential for staff burnout and individuals seeing the necessity to look for higher wages in the private sector. Our work with smaller organisations in the sector indicates that funders and commissioners need to be understanding that (a) money allocated to workforce costs is likely now to be not enough, and (b) staff turnover in smaller organisations creates big ripple effects in terms of organisational capacity and meeting outcomes and timeframes as agreed.

Subsidy

Although this point requires further exploration across a larger sample to make more concrete conclusions, the data highlighted that no organisations have contract income without grant income. This perhaps supports the ongoing feedback from the sector that public sector contracts held (whether via local authorities, central government or NHS institutions) are not commercially viable, i.e. they do not offer a surplus and actually operate at a loss most of the time. In turn, organisations require grant or donations to both subsidise the delivery of such contracts and also invest in their organisation to ensure its sustainability. The requirement for subsidy seemed to be common across all types of mental health organisations. Even those with a track record of generating trading income, such as training/consultancy organisations, had a median income from ‘commercial and trading’ sources of 62%. This suggests that even for those with more commercial enterprise income streams there is a still large remainder of income required from other sources to deliver their mission. This is an important reflection for organisations in the early stages of trading ventures, that reaching 100% financial self-sufficiency from trading is not easy and other sources of income are often still needed. But also it’s a useful note to funders that the presence of trading income doesn’t equate to no need or role for grant funding; it can be crucial for sustainment of services or ensuring sustainability of an organisation.

Tight margins

Perhaps surprisingly, the data highlighted a fairly positive picture in terms of working capital available in the sector. Eighty percent of organisations showed a working capital of 1.2 or more which in all sectors is considered to be a reasonable level, with a positive cash balance being delivered. However, there are limitations to this metric when considered as a single point in time. It is wise for organisations to monitor the trend of working capital to provide greater insight into the organisation’s financial health. And with the current external environment this type of tracking over time is even more crucial. Simultaneously, the data stressed the tight margins in which the sector was operating within in 2019/2020, and therefore highlights the fragility of the sector particularly when you layer on top a recovery from a pandemic followed by a cost of living crisis. The sample showed only a median of 4% surplus per year being added to reserves in 2019/20, which undoubtedly limits an organisation’s ability to develop and sustain their future, or keep pace with crippling inflation increases. And taking account of what has happened since then it feels highly likely that the comparative figure for 2022/23 could be a much worse outcome for many smaller providers in the sector.

With such a challenging financial forecast ahead, organisations will need to showcase their ability to adapt again, as they did with a pandemic. They will naturally explore new opportunities for income, ways to make resources go further and options for cutting costs. However, the reality is that organisations may also have to make some difficult decisions and prioritise their activity in line with what makes the biggest impact. While challenging to wind-down activities it may be necessary for some organisations in order to ensure their sustainability.