State of the Sector in 2022: recovering from Covid

As we moved out of peak Covid with its lockdowns and social distancing and into more of a recovery phase, the key financial trends based on our analysis of charity data for the period 2021-22 show a sector slowly returning to normal.

Last year we pulled out six highlights for the financial picture in 2020/21.  It was a story of two halves.  Covid hit most of the sector hard, and small organisations in particular took a big financial hit.  Many smaller charities had to pause all activities and saw their income and spending fall sharply. Meanwhile many medium and larger charities stepped up to deliver new services and meet increased demand, with many accessing additional crisis funding and grants. Falls in income from trading and in-person activities were mitigated by a £1bn (50%) boost in public sector funding to the sector.

In 2022 we saw a sector bouncing back financially. Bouncing back may be a bit too, well, ‘bouncy’ a term to describe a sector dusting itself off and tentatively rebuilding after the pandemic flattened many, but in general most organisations including smaller ones saw their incomes rally, and expenditure on activities and services rose by nearly £1bn.

However, we know that much of the sector’s funding was dependent on post-Covid recovery grants and one-off payments, and funding remains a top challenge for the sector.  We also know from the Scottish Third Sector Tracker that financial pressures continue to grow due to factors such as rising costs and inflation.  We’ll be analysing the sector’s 2022-23 finances after the summer to explore these issues in more depth.

Meanwhile, here are a few highlights from the latest stats.

The voluntary sector’s overall income and expenditure increased in 2021-22.

Between 2020 and 2021 the sector’s overall income remained flat – the drying up of many income sources was mitigated thanks to increased public sector funding and grant-making trusts, which was enough to keep things steady. As we moved into the post-Covid recovery phase, the Scottish charity sector's overall income started to grow again, increasing by £560m, or around 8%, between 2021 and 2022.

One third of the rise in income was due to continued growth in the Housing sector. A further third of the rise was due to a recovery in the financial situation of Culture & Sport sector, which was hit harder by the pandemic than any other sub-sector.

The majority of organisations saw their income increase between 2021 and 2022.

53% of Scottish charities experienced an increase in income in 2022, up from only 27% the previous year. Only 31% of charities saw income fall between 2021 and 2022, down significantly from 62% the previous year.  Smaller charities in particular showed a recovery, with 50% of micro and small organisations seeing incomes increase in 2022, up from only 21% in 2021.

Spending outstripped income for many

While incomes were rising, expenditures were also rising across the board.

64% of Scottish charities increased their spending in 2022. Only 27% decreased spending compared with 72% of charities the previous year.

Many organisations spent more than they had coming in, with over a third of medium and large organisations reporting a deficit, up from a quarter in 2021. While this overspending is likely due to the exceptional circumstances the sector found itself in, it will be interesting to see if this unsustainable trend continues.

Increase in the number of charities winding up

And finally, while the overall financial picture in 2022 looked healthier than we might have expected, we did see an increase in the number of charities winding up in 2022 and 2023. These closures are due to a number of factors not just Covid and increased financial pressures, but it’s an indicator of the health of the sector that we’ll be keeping an eye on.

For these stats and more see https://scvo.scot/research/facts-figures
For the current issues facing the sector see  https://scvo.scot/research/scottish-third-sector-tracker