As the fourth winter since Covid’s emergence approaches, the easing of financial concern that is taking place in much of the rest of the economy has not yet been felt by the charity sector. After a year in which inflation meant that the value of donations, grants, and contracts diminished, and donors reduced contributions, many charities remain in challenging financial straits. More than a third (35%) of small and medium charities and over four in ten (44%) large charities reported that their finances deteriorated in the past three months.

The sector faces its usual seasonal influx of demand on the back of already heightened need following both the cost of living crisis and the pandemic. The results from the latest wave of the quarterly VCSE Sector Barometer show that these limited improvements in the economy have not yet fed through into any real decrease in demand for charities’ services. Indeed, three-quarters (76%) of large charities reported growing demand for their services in the past three months, the same proportion as this time last year.

The tale of two sectors in the charity sector is deepening. As organisations work hard to adapt to these new, seemingly permanent, higher levels of demand, there are distinct differences between how large and small charities are faring.

The largest charities, which possess well over half the sector’s financial resources, are increasing their capacity to step up to the demand challenge. They have done this primarily by expanding their workforce. Charities have employed more people every quarter since the end of 2021, and the most recent Bank of England data shows that charities are increasing their pace of recruitment. The charity sector workforce grew by over 5% in the third quarter of this year, almost double the 2.8% growth seen in the private sector. In part, the increased pace of recruitment reflects a looser labour market overall, but it has been helped by improved wage growth in the sector, which means charities are better able to compete with the private sector for new employees.

Meanwhile, among medium and large charities, concerns about future finance, which have loomed large since the beginning of the pandemic, appear to be abating. This time last year, around half of medium and large charities (44% and 56% respectively) expected their finances to deteriorate over the next three months; this now sits at just under a third (28% and 31% respectively). Yet the financial picture for charities overall remains stark, with almost two-fifths (36%) reporting that their financial position has deteriorated over the past three months.

But it is small charities that appear to be struggling the most currently. These organisations, which make up 80% of the charity sector by organisation, are vital to many communities, but have found weathering the last three-and-a-half-years, since the start of the pandemic, particularly challenging. Close to one in four (24%) small charities report that their finances improved this quarter, compared to around three in ten medium and large charities (31% and 29% respectively). Financial pressures for small charities are being compounded by difficulties recruiting volunteers. Where larger charities can more easily take steps to increase their capacity by growing their workforce, small charities are often highly reliant on volunteers. The great volunteering decline nationally is hitting small charities hard – almost six in ten (59%) small charities report that recruiting volunteers is a major concern for them, compared to 15% of large charities.

For charities of all sizes, the combination of increased demand, challenges recruiting volunteers and, until recently, recruiting enough paid staff to deal with growing demand, is impacting staff workload. Alongside the impacts of the cost of living crisis, this is taking its toll on staff wellbeing. Three in ten (30%) charities report increased rates of staff burnout over the past year, while a quarter (25%) report increased absence due to sickness. These pressures are not unique to the charity sector, with sickness absence across the economy reaching a 20-year high in 2022. Nonetheless, many charity sector leaders are taking clear steps to try to address these issues for their staff, from offering flexible working opportunities, to providing financial wellbeing training, mental health support or paid-for social activities. But for smaller charities with limited resources, this support is much harder to provide.

While the wider economic picture is beginning to improve, this will take time to translate into meaningful changes in the lives of many users of charity services. The result is continued pressure on a sector managing both growing demand and ongoing financial pressure. Where they can, charities are taking steps to increase their capacity by expanding and supporting their workforce. But the pressure might be felt most by charities that do not have this option and are reliant on volunteers, particularly small charities with few or no paid staff at all.

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