UK charities face a financial reckoning. Recent Charity Commission data shows 42.6% of charities spent more than they earned in 2023, nearly half operating at a deficit. This marks a five-year trend that continues to steepen.

The NCVO describes it as a “perfect storm”: costs climbing, income shrinking, demand exploding. For trustees, the issue has moved beyond whether your charity will feel the impact.

The question now centres on how swiftly you’ll respond to safeguard what you’ve built.

Below, you’ll find the warning signals that matter and seven concrete actions your board should evaluate immediately.

Understanding the Charity Funding Crisis in 2025

Walk into any charity finance team today and you’ll likely find someone wrestling with figures that simply won’t reconcile. Income projections that looked solid six months ago now seem optimistic. Budget lines that once held steady keep expanding. This isn’t happening in isolated pockets; it’s sector-wide.

Charity Deficit Statistics: The Numbers That Matter

The deficit rate jumped from 38.3% in 2022 to 42.6% by year-end. That upward trajectory has maintained its pace for five consecutive years. Total sector surplus collapsed by 77% within two years, tumbling from £3 billion to £701 million. When trustees were surveyed, 46% confirmed they’d already altered operational plans because of cost pressures.

Household donation patterns shifted dramatically. Meanwhile, the proportion of people receiving essential aid from charities tripled from 3% to 9% of the population.

How the Crisis Affects Small Charities

Charities earning under £100,000 annually showed the highest likelihood of overspending. Many hold reserves covering barely three months of operations. Last year, 22.5% reported operating deficits, compelling them to drain contingency funds just to maintain basic service delivery.

Why Charities Are Struggling Financially: The Three Main Causes

Three distinct forces converge to create this pressure, each powerful enough on its own. Together, they’re reshaping how charities must approach financial planning.

Rising Charity Operating Costs and National Insurance Changes

April 2025 brought a particularly sharp blow. Employer National Insurance contributions rose by 1.25 percentage points, with no exemption for voluntary organisations. The NCVO calculates that this adds roughly £1.4 billion annually to sector-wide labour costs. Simultaneously, minimum wage rates increased, creating ripple effects through entire pay structures.

Finance teams find themselves with nowhere left to trim. Administrative budgets have been pared down repeatedly. The efficiency gains that were once available through process improvements have largely been captured.

Increased Demand for Charity Services During Cost-of-Living Crisis

Charities supporting people in poverty report caseloads unprecedented in their history. Between 2019 and 2023, larger charities increased programme spending by 23%, yet trustees still describe unmet need. Boards face an impossible calculus: reduce services precisely when vulnerability peaks or continue spending beyond sustainable levels.

Declining Charity Income: Government Funding Cuts and Donor Fatigue

Government funding has contracted by approximately £1 billion annually in real terms since 2020. Where 58% of the population contributed in 2019, only 50% did so in 2024. Wealthy funders are becoming more selective. Competition for remaining funding has intensified dramatically.

Financial Warning Signs for Charity Trustees

Financial distress rarely announces itself dramatically. Instead, it accumulates through small signals that boards can easily dismiss individually.

Charity Reserve Levels: When to Worry

Unrestricted reserves declining quarter after quarter warrant immediate investigation. Operating on reserves covering less than three months of costs leaves zero margin. A delayed grant payment or unexpected equipment failure could push you into genuine difficulty within weeks.

Cashflow Problems and Persistent Deficits

Late supplier payments signal cashflow problems developing beneath the surface. Three consecutive quarterly deficits represent a pattern requiring action. One difficult quarter happens occasionally; three indicate a systematic imbalance between income and expenditure.

Poor Financial Reporting and Funding Instability

If your finance team consistently delivers accounts late or produces reports missing key information, you face problems beyond the numbers themselves. Increased reliance on short-term funding indicates an unsustainable model that exhausts staff and frustrates funders.

How Trustees Can Improve Charity Financial Management

Boards that wait for perfect information will find themselves managing decline rather than steering recovery. The actions below represent practical interventions trustees can initiate immediately.

Step 1: Strengthen Financial Oversight and Controls

Make finance a standing agenda item at every board meeting. Ensure you receive up-to-date management accounts monthly, not quarterly. Request cashflow forecasts extending twelve months forward, updated monthly to reflect the latest position.

Compare your key performance indicators against your reserves policy and operational benchmarks. Track restricted versus unrestricted balances carefully. Calculate your months of operating reserves at each reporting date. This level of engagement isn’t micromanagement – it’s essential stewardship.

Step 2: Cut Non-Essential Costs Strategically

Identify discretionary spending and pause it immediately. Negotiate rent holidays with landlords – many property owners prefer temporary concessions to losing tenants entirely. Consider shifting in-person services to digital delivery, where this maintains quality whilst reducing costs.

Explore resource-sharing with similar organisations. Could you share office space or back-office functions? Review every contract systematically. Insurance policies can often be retendered for better rates. One children’s charity we worked with saved £18,000 annually simply by consolidating their insurance arrangements.

Step 3: Boost Income Through Strategic Fundraising

Engage your current donor base proactively. Write personally to loyal supporters explaining the increased need. Launch targeted fundraising appeals tied directly to your core mission. Specific campaigns – “Help us provide 500 emergency food parcels this winter” – resonate far more effectively than generic requests.

Review your Gift Aid claims meticulously. HM Revenue & Customs estimates millions in unclaimed Gift Aid annually because charities lack systems to capture declarations properly. Consider whether assets could generate a modest income.

Step 4: Deploy Charity Reserves When They’re Needed Most

Review your reserves policy immediately. Many trustees hesitate to deploy reserves, treating them as untouchable. Reserves exist precisely to support organisations through difficult periods. Calculate how long your unrestricted reserves would sustain current operations if income ceased entirely.

For charities holding permanent endowments or restricted trust funds, investigate whether mechanisms exist to vary purposes or release capital. Consider selling underused assets.

Step 5: Diversify Your Funding Base

Reduce dependence on any single funding source. If one grant represents more than 30% of your income, a sudden withdrawal could prove catastrophic. Explore earned income opportunities aligned with your charitable purposes. Training courses related to your expertise can generate surplus whilst advancing your mission.

Digital fundraising remains underutilised. Crowdfunding campaigns for specific projects can reach new audiences. You could raise tens of thousands of pounds through a single Facebook campaign sharing beneficiary stories sensitively and effectively.

Step 6: Seek Professional Guidance Early

Consult your auditor or independent examiner about your financial position. Join sector networks or your local Council for Voluntary Service. These organisations offer peer learning opportunities, practical resources, and benchmarking data.

Consider engaging specialist charity finance support before problems become acute. External advisors bring experience from multiple organisations, spotting solutions you might not consider. Keep detailed records of all advice received – this demonstrates the diligence expected of trustees.

Step 7: Strengthen Governance During Difficult Times

Even amid financial pressure, robust internal controls remain essential. Continue regular bank reconciliations. Maintain segregation of financial duties. Require dual authorisation for payments above modest thresholds.

The Charity Commission reminds trustees that difficult choices often become necessary, yet each must serve the charity’s long-term interests. Ensure your board maintains the financial literacy needed to challenge assumptions. If gaps exist, arrange trustee training on charity finance or SORP compliance.

We Remove Financial Headaches for Charity Trustees

Financial pressure across the charity sector continues to intensify. Costs keep rising, income remains constrained, demand shows no signs of abating. Trustees face genuinely difficult decisions in the months ahead.

Yet charities that act decisively, strengthening oversight, cutting costs strategically, diversifying income, deploying reserves purposefully, can navigate this squeeze whilst protecting their mission.

At Charity Accounting Partners, we specialise in supporting trustees through challenging financial periods. From management accounts and cashflow forecasting to reserves planning and financial health checks, we deliver trustee-focused support that builds confidence and clarity.

Our team understands the unique pressures facing charity boards. We translate complex financial information into accessible insights that enable informed decision-making. Book a free discovery call with our charity finance specialists today and take the first step toward stronger financial resilience.