The Tortoise or the Hare: Predicting the financial performance of English and Welsh charities during Covid

• In Event: Covid Impact on the Third Sector

Abstract

Many nonprofits worldwide were affected severely by Covid operationally and financially. In the UK, the Covid crisis led to a ‘huge increase’ in demand for services, at the same time as NPOs faced organizational challenges and steeply increased costs adapting to the pandemic situation (Harris, 2021). Research on England and Wales (Clifford, McDonnell, & Mohan, 2023) has illustrated the financial impact of the crisis on nonprofits: the median charity experienced a 13% real decline in annual income, smaller organizations and organizations in certain fields of activity were more affected. Importantly, funding modes and the importance of government funds also helped explain which organizations were more affected than others. More generally, we know that operating reserves helped weather the financial shock caused by the pandemic (Irvin & Furneaux, 2022). But what is less clear is what constitutes financial resilience more broadly. Does a track record of steady income and low risk provide a ‘tortoise’ comfort in a crisis? Or do ‘hares’, that are more volatile but more used to fluctuations in their income, fare better?
This article focuses on the financial viability in the run-up prior to the pandemic and asks how the financial development of an organization in the prior decade predicted financial performance/risk of charities during COVID. We use two key variables of financial viability (Wicker, Longley, & Breuer, 2015), namely the income trend and income volatility which serve as measures for financial capacity and financial sustainability (Bowman, 2011) to analyze financial performance during Covid. The two variables can be a measure of risk – related to how likely the non-profit organizations is to continue operating services smoothly (Tuckman & Chang, 1991).
This research builds on literature analyzing organization resilience during crises (e.g., Young & Searing, 2022). Financial viability is a critical success factor to accomplish the organizational mission (Young, 2007). In particular, there is a history of predicting risk of financial failure, for example using Tuckman/Chang (1991) financial indicators. But COVID provides a unique opportunity to explore resilience in an unanticipated and sudden crisis. Are high reserves and steady, diversified income enough, or is resilience created at least partly in adversity?
We answer the research question using longitudinal financial information from charities’ annual returns for the years 2004 to 2019, observing fifteen years of organizational development prior to the Covid crisis. The charities’ data are collected through annual returns submitted to the Charity Commission for England and Wales. We operationalize measures of financial risk, trend and volatility, as well as other organizational characteristics in order to model the outcomes (income shock; organizational demise) in the period COVID period 2020 to 2022. We explore whether, controlling for other factors, the slow and steady ‘tortoises’ with steady growth and stable income were more or less resilient than the ‘hares’ with more volatile income and growth patterns. We show the variety in the effects of the COVID crisis on charities fortunes, and argue for the importance of taking a longer term view of risk and volatility in considering charity resilience.

References

Bowman, W. (2011). Financial capacity and sustainability of ordinary nonprofits. Nonprofit Management and Leadership, 22(1), 37-51. doi:10.1002/nml.20039
Clifford, D., McDonnell, D., & Mohan, J. (2023). Charities’ income during the COVID-19 pandemic: administrative evidence for England and Wales. Journal of Social Policy, 1-30. doi:10.1017/S0047279422001015
Harris, M. (2021). Familiar Patterns and New Initiatives: UK Civil Society and Government Initial Responses to the Covid-19 Crisis. Nonprofit Policy Forum, 12(1), 25-44. doi:doi:10.1515/npf-2020-0044
Irvin, R. A., & Furneaux, C. W. (2022). Surviving the Black Swan Event: How Much Reserves Should Nonprofit Organizations Hold? Nonprofit and Voluntary Sector Quarterly, 51(5), 943-966. doi:10.1177/08997640211057405
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Young, D. R. (2007). Why study nonprofit finance? In D. R. Young (Ed.), Financing nonprofits (pp. 3-20). Lanham, MD: AltaMira Press.
Young, D. R., & Searing, E. (2022). Resilience and the management of nonprofit organizations: a new paradigm. Cheltenham: Edward Elgar Publishing.

Authors

• Astrid Pennerstorfer, Vienna University of Economics and Business

• Alasdair C Rutherford, University of Stirling