Nick Moore: Should charities have held greater reserves before the pandemic?

27 Nov 2020 Voices

It’s not always about the level of reserves held but the critical thought that goes into them, says Nick Moore in a blogpost written to coincide with Charity Finance Week

This time last year I spoke at the Charity Finance Summit on the thorny issue of charity reserves, and my closing slide said: “By and large, trustees who believe that their charity needs excessive reserves have often lost their incisiveness and the appetite for innovation and challenge. In short, trustees and charity managers in such organisations have settled for the quiet life.”

Those days seem a lifetime ago now – most of us knew nothing of lockdowns or test and trace, and Professor Chris Whitty was contentedly working to secure the nation’s health without us knowing! I’ve been asked, therefore, to consider whether maybe charities that were holding levels of reserves that appeared to be excessive have been vindicated by the ongoing impact of Covid-19?

Black swan event

I used to have a boss that was fond of saying: “We all look much better managers with a bucketful of hindsight”. I think most would agree that this global pandemic is a textbook example of a black swan event. Already it has dramatically altered the lifestyles of people right across the planet; travel and trade patterns have possibly changed for a generation, we face a recession that looks set to leave virtually no country untouched, and there is still no end in sight.

NCVO predicted that the sector would lose £4.3bn of income during the first full lockdown, and although I’ve seen no update on what actually happened, the news regularly features charities making redundancies and service cuts. Meanwhile unemployment and mental health pressures are increasing, bringing a greater demand than ever for many charities’ services; even more so in low-resource countries.

One of the main components of a reserves policy is the need to protect continuity of the charity’s work against uncertain future income streams, and trustee boards should have been considering and monitoring that. We also know that the purpose of charities is not to accumulate funds – reserves should exist to help deliver against objectives; they are not an end in themselves.

Money tied up as reserves is by definition not delivering any impact, and every month it remains in a bank account is a month more of delay on benefit accruing from its use. It’s difficult therefore to justify holding reserves against the sort of unforeseen event that is described quite rightly as unprecedented.

That said, trustees sometimes deliberately build up reserves because they are waiting for the right opportunity to launch a new service or major initiative. The impact of such a strategy may be particularly apparent for smaller charities where a relatively small amount of cash may represent a disproportionately large increase in reserves.

Any charity that found itself in this position at the start of the pandemic may consider themselves fortunate as they will have had the opportunity to re-evaluate that move – is it still an appropriate strategy or are they now in survival mode, with the money more urgently required elsewhere in the current context?

Types of funding

Many of the charities facing the largest decreases in income are those with significant trading income, either from charity shops or through entrance fees or tickets. Most theatres and venues have seen income reduced to zero overnight! It’s difficult to see how such changes could reasonably have been covered by increased reserves.

Trading income reflects an approach that is closer to a commercial mindset than a donation-drive one – sweating assets to drive earnings and minimising costs would all have been key measures to maximise the surplus available for charitable purposes. It’s likely that some investment from reserves may have been necessary to pump-prime trading, and charities cannot be criticised for such an approach now with hindsight.

The loss of income from events, including sponsored activities, has been another major blow for many. The question is not really whether trustees should have held reserves against targets from these being missed, but rather the extent to which they considered alternative scenarios.

Part of trustees’ duties require them to be prudent about their assumptions, but where such income streams are well-established over several years, the trustees might have been able to defend covering, say, a 20% reduction from year-to-year, not reductions of 50% plus…

Holding reserves for the right reasons

I have always stressed my view that the overall level of reserves held is not the primary issue. Much more important is the depth and thoroughness of critical thought employed in determining a reserves policy and its place within an overall financial strategy.

Some of the most bizarre conversations I have witnessed recently have been charities cutting back activities in order to preserve their reserves. Colloquially we say that reserves are needed in order to cope with a rainy day – if the Covid-19 pandemic doesn’t represent rain of monsoon proportions, then I don’t know what does!

Such comments demonstrate that a reserves policy is actually being seen merely as a minimum amount to be held “no matter what”, whereas an effective policy needs to cover not only how much is to be held, but also why and thus when it will be appropriate to draw them down.

An interesting piece of research now would be to examine whether any charities that entered 2020 with excessive reserves have been able to quickly release them to meet increased demands due to Covid-19, or whether they continue to sit on high reserves because they have lost the ability or agility to release them quickly.

Nick Moore is a freelance consultant to the charity sector and an associate lecturer in charity management at St Mary’s University, Twickenham

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