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Russell Hargrave: How healthy were charity reserves going into the coronavirus crisis?

06 Aug 2020 Voices

Did charities have enough money in the bank ahead of the coronavirus crisis? Russell Hargrave investigates

When parents tell kids not to spend their pocket money all at once, it isn’t just because too many chocolate bars are bad for you. It’s also because saving cash is, well, sensible.

Not that saving is easy. The temptation to splurge cash is overwhelming. This is as true for an eight-year old in a sweet shop as it is for, say, a charity finance reporter in his late thirties.

And where will that temptation be felt more keenly, and for good reason, than at a charity? The need to spend money to address social problems – from poorly kids to homeless families to lost dogs – is as pressing as ever.

Yet not spending has its own, delayed rewards. Stashing money away for the future starts to look like a very smart choice when an emergency hits and the very long-term survival of that charity is at stake.

A very bad week

With coronavirus, the big emergency has hit.

Last week saw a host of charities announce swingeing cuts. Thousands of jobs will go, including at the British Heart Foundation, National Trust and Comic Relief. Breast Cancer Haven is closing some of its centres and laying off staff; African Initiative will shut completely next year.

Charities everywhere are looking into their books and thinking: what have we got saved and how can we use it?

Running low

Bad news on this front arrived last month, courtesy of the accountancy firm BDO.

Digging into the finances at 50 of the UK’s biggest charities, they found that those charities started 2020 with free reserves worth, on average, two months of running costs.

This was down compared with 2017, BDO says, with the amount in reserve previously standing above three months' worth.

A billion-pound problem

It gets worse. The research also showed that some of the stuff these charities included in their reserves (mainly fixed assets like buildings and equipment) couldn’t actually be released quickly enough to get cash flowing at short notice.

BDO estimated that this gap, between what the charities said they had in reserve and what they could actually access, was – yikes – £2.3bn.

Charities could not have predicted the pandemic, of course. But, at the moment it hit, reserves at some of our biggest charities were smaller, and less robust, than in years gone by.

Does the sector need new guidance?

BDO, in common with experts like Roberta Fusco, director of policy and engagement at the Charity Finance Group, said that this was partly a result of poor guidance. They have a point.

The Charity Commission's advice soberly warns trustees against letting reserves get too high (this may “tie up money unnecessarily”) or drop too low (this endangers “the charity’s ability to carry on its activities in future”). A gaping omission is any benchmark to measure what “high” or “low” actually means. The words on the page are not girded to anything solid.

Trustees are confronted with both a legal duty to ensure money is spent on the cause and vague regulatory warnings about the importance of saving. As Fusco says: “We have been giving charities a lot of mixed messaging.”

Spending vs saving

In recent years, the mood music in the sector has been for large charities in particular to move cash out of growing reserves to the frontline. Cancer Research UK, for example, published new reserve policies in 2017 committing to do exactly this.

There are moral and practical reasons for the shift.

Most obviously, charities are there to help people. Getting money out the door is the whole point.

This is how Kate Lee, chief executive of the Alzheimer’s Society, put it a fortnight ago: “We have not held significant ‘reserves’ or savings for a rainy day in the past. Although we have always remained around the level recommended by the Charity Commission, we have felt that people don’t donate to have money sat in the bank, and have put our funds to work straight away.”

You can feel the moral force in the second sentence: surely money is better being put to work for the cause, not sitting around unspent.

Getting grants

Plus holding lots of money in reserve can be a practical problem if you want to bring in more funding.

Some big funders, including the government, won’t dole out cash if a charity is thought to have plenty of money set aside. They argue, not unreasonably, that a charity doesn’t need funds to deliver a service if it could use some of its unrestricted reserves to do so instead.

Monsoon season

So lower reserves have been the direction of travel in recent times.

Angela Kail, the director of consulting at the think tank NPC, says: “If you look over the past five years, you will have seen lots of charities try and spend down their reserves, taking on board that feedback.”

Kail adds: “We have moved from a ‘Keeping some money aside for a rainy day’ approach to ‘What are we actually saving for?’ Particularly when austerity hit, people thought that was their rainy day.

“But now we have found out what rain is.”

The future

There is a little bit of good news.

As we saw at Civil Society Media’s Trustee Exchange last week, charities large and small are in good hands at a difficult time. Trustee boards are all set up to learn and share ideas about how to come out the other side of this horror.

But, in the meantime, charities are digging into their savings. Reserves are “going down fast”, says Alex Whinnom, the chief executive of Greater Manchester Centre for Voluntary Organisations, talking about organisations in his region.

Charities don’t have much choice: emergency government funding is not coming through quickly enough for many; trading income has fallen off a cliff; and mass fundraising events seem as far away as ever.

So we are where we are. The official advice is messy, the trend is for lower reserves than in years gone by, and research suggests reserves may be even smaller than they seem.

The sector has been through some very tough months. There is still a long road ahead.

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