Charities are set for a difficult winter ahead. Could it finally be time to tap into vital reserves?
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The concept of piling away a stash of cash for a rainy day is not a new concept – charities have been holding reserves since their inception. Saving money in an emergency fund in the event of a potential crisis is imperative for charities to ensure financial security and stability. But knowing when to access the golden nest egg is no easy feat. After all, what defines a ‘rainy day’, or an ‘emergency’ for a charity? And what are the long-term implications if the egg is cracked too soon?

These are questions many charities are asking as they brace themselves for a difficult winter ahead; one where demand is soaring and income is falling. Findings from a survey carried out by NCVO found among 580 of its members, almost nine in 10 (85%) are predicting this winter will be ‘as tough, or even tougher than the last’.

More than a quarter believe they won’t be able to meet increasing demand for their services, while only 35% believe they’ll be able to navigate further cost cutting measures – suggesting they’re already spreading themselves thin.

“As charities across the country work towards another difficult winter, our latest research reveals the alarming scale of the challenges facing our sector,” Sarah Vibert, CEO of the NCVO says. “With costs climbing, income falling and demand increasing, this is no longer just a cost-of-living crisis. For charities, who give so much to society, this is a cost of giving crisis.”

Tip of the iceberg

A further survey from match funding platform Big Give has found one in five people do not plan to give anything to charity this December amid the surge in cost of living. If spread across the course of a year, the dip represents a staggering £3.2 billion drop in income from donations.

For many charities, this ‘cost of giving crisis’ is the tip of the iceberg after a series of consecutive crises that have battered finances and placed increased pressure on income. Whilst access to quick-win grants from local funders and help from corporate partners has kept many charities afloat, the funding options available are slowly starting to run out.

Youth charities, for example, are warning that cuts to funding and increased waiting lists for their support have left them struggling for survival. More than a third say they only have enough reserves to allow them to operate as normal for less than six months. A quarter only have enough for between six to 12 months, while only one in five have reserves for more than a year of delivering support to young people.

Sufficient funds

In 2016, the NCVO estimated that around two thirds of charities held reserves and the overall amount of reserves held in the sector equated to some £46 billion. The average amount per charity on this basis stands at around six months’ worth of income.

But the Charity Commission stresses there is “no single level, or even a range of, reserves that is right for all charities”. Instead, it’s open to discussion and subject to a charity’s individual needs.

“There is no one size fits all approach: for some with low overheads, having one- or two months’ worth of expenses on hand might be enough,” Alison Taylor, CEO of CAF Bank explains. “Whereas another charity with high fixed costs has a different financial risk profile and may need three to six months cost cover on hand,” she adds.

Charities are advised to set a reserves policy that demonstrates the trustees’ understanding of the organisation and the challenges it might face in delivering its purpose and the external and internal factors that need to be accommodated. Michele Price, charity and philanthropy partner at Gunnercooke, who specialises in functional governance, argues that the figure associated with reserves “should not be the back of the fag packet calculation”.

“It should be a thoughtful and considered process that engages with everyone across the organisation to take on board all the variables, resulting in a well thought through, justifiable and evidence-based figure,” she says.

“That figure may differ widely between a grant giving foundation with minimal staff and a front-line service provider. That is why I encourage clients to move away from clutching to a simplistic calculation and to invest in setting a reserves amount that reflects their charity’s needs and ambitions, that will truly function for them.”

Price encourages charities not to create a reserves policy that sets a reserves figure in stone; instead it should be revisited frequently and in response to unexpected factors. “Given recent experience, all charities should be recalculating reserves figures taking into account the spike in inflation and the cost-ofliving crisis,” she says. “A reserves figure can also be a range or a band rather than a standalone amount. For instance, setting a reserves range based on predicted inflation levels or rises in demand allows the charity to have resilience and make funds available should a contingency arise.”

Transparency is key

While a healthy nest egg provides a safety cushion for many charities, it can also come with complications. For example, some funders will refuse to provide charities with new money if they have enough set aside in reserves. Furthermore, many will and do argue that a charity is failing to have maximum impact if it is holding back much-needed funds for a so-called ‘rainy day’.

Oxfam is an example of a charity that has recently come under fire for this. The global super-major charity, with an income of around £373 million, found itself in hot water after staff announced plans to stage a 17-day walkout throughout December for the first time in the charity’s 81-year history.

The crux of the issue is that staff are angry that average wages had been cut in real terms by 21% since 2018, forcing many of the charity’s own workers to use foodbanks, while the charity holds cash reserves of around £45 million.

“Oxfam’s hypocrisy is astounding. This is a charity in robust financial health […] meanwhile, Oxfam’s own staff are on poverty pay, with some using foodbanks and unable to pay their rent. How can its leadership possibly justify ignoring its workers’ demands to be paid fairly and blocking their union? Oxfam can well afford to pay a reasonable rise without the slightest impact on its operations here or abroad,” Unite the Union said in a statement.

Some charities have also reported being refused funding due to their ownership of a sizeable nest egg. However, the Charity Commission explains that if a charity’s reserves appear to be ‘too high’, it is likely that the trustees have not fully explained the reasons why they are keeping the level of reserves that they are.

“If, for example, a charity is using a standard form of reserves policy wording, it is not likely that it will tell the charity’s story or explain why the charity has the level of unspent income that it does. This might also be an opportunity to check that the charity’s policy is appropriate for its needs,” the regulator explains.

“Second, because they are having difficulty in using their funds. A charity with excess reserves or unspent funds should explore the reasons for this, for example whether they could do more to increase the number of beneficiaries entitled to use the charity’s service doing so.

“If ultimately a charity has more resources than it needs to fulfil all of its purposes then the trustees must consider whether the purposes of the charity should be amended to enable the charity to operate more effectively.”

Transparency is key here for charities to ensure they are not punished for holding too much in reserves, just as much as they might be punished for holding too little. For example, funders will also be looking for charities to hold a prudent and clearly explained level of reserves, which “inspires confidence that a charity’s finances are well-managed”, Jayne Adams, charities and not for profit solicitor at law firm Setfords states.

“This can also signal which areas are currently unfunded and therefore support the charity’s case for funding,” she adds. “Charities must be transparent about their application of funds and are held to high standards of scrutiny and accountability. Funds must also only be applied in the best interests of the charity. Trustees may make a justifiable decision to amend their reserves policy, and/or to reduce the reserves held, but they can’t legitimately hide money as a ruse to try and get more.”

Permission to access

So, when should charities utilise their funds, without it being detrimental to any future funding? Gunnercooke’s Price suggests accessing reserves should “really only ever be a short-term fix, rather than an accepted norm”.

“Sadly, it is likely that the recent economic crisis has brought to the surface those organisations that may have neglected or shied away from this topic resulting in their failure or closure. It is incredibly sad to see, but a lesson that every size of organisation should seek to learn from. As a lawyer representing grant funders, if I am reading an annual report with a cut and pasted reserves statement and no apparent effort to take into account current factors, then my heart sinks. If ever there was a time to engage proactively with the management of your reserves it is now,” she adds.

According to recent research from CAF, 50% of charities have accessed reserves since lockdown first began. Furthermore, eight in 10 charities with reserves reported that they need to have access to some of their reserves without a notice period and half reported that they are still building organizational and financial resilience in the wake of Covid-19.

Macmillan Cancer Support recently made the decision to cut its total reserves by more than a third as it aims to increase its spending on fundraising operations and services amid a dip in income for the charity during 2022. The charity’s annual accounts show its total reserves stood at £48.3 million as of December 2022, compared to £74.1 million the previous year. Simultaneously, it boosted fundraising spend to £73 million.

“Choosing to invest in our fundraising means we can generate more long-term income to enable us to reach more people living with cancer,” the charity said in the report.

It added that the cut in reserves is part of its strategy of operating “a liquidity rather than a reserves policy”. “Our priority continues to be to spend as much of our money as possible on services for people living with cancer”.

It could be argued that more charities should follow in Macmillan’s shoes, liquidising reserves to generate more long-term income. But Adams explains that it entirely depends on a charity’s circumstances and what it in it’s best interests.

“This requires the trustees to consider the needs of present and future beneficiaries, as well as risks, and to make a strategic decision about their use of reserves,” she says. “The application of reserves, as well as the reserves policy, are dynamic matters which should be kept under regular review by charities”.

CAF’s Taylor agrees, and, as charities work to fight against the financial turmoil of a costly winter ahead, she emphasises that the point of holding reserves is to “navigate challenging times and for some, that time may be now”.

“If reserves do need to be accessed, perhaps to top up funding operating costs or invest more in fundraising, this should be clearly discussed and documented. As the environment changes around us and we need to shift strategies to devise a new financial plan, reserves can provide a vital bridge to a sustainable future.”

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