Over a fifth of charities entered the pandemic with reserves equivalent to less than one month of expenditure, while a tenth could only survive on theirs for a few days at most, according to research.
Assessing the financial reserves of English and Welsh charities on the eve of the Covid-19 pandemic, by Professor John Mohan from the Third Sector Research Centre at the University of Birmingham and Dr David Clifford from the University of Southampton looked at the accounts of over 12,700 English and Welsh charities with incomes over £500,000 that were filed with the Charity Commission for the financial years ending in 2018 or 2019.
It found that found some charities operating in certain fields of activity – namely culture and recreation, employment and training, and social services – were more likely to have low levels of reserves, at typically less than four months of expenditure.
Younger charities were also found to be more vulnerable, with those operating for over 50 years old generally having enough reserves to cover running costs for over six months. Those under 25 years old had around three and a half months expenditure in reserve, while reserve levels were also likely to be lower for organisations relying on sales of services and contracts as their main income source, rather than on fundraising or donations.
Where charities were located had an impact too. Nearly half (48%) of charities in Yorkshire and Humberside have less than 3 months reserves followed by Wales (46%), the East Midlands (45%) and London (44%).
According to Charity Commission guidance, a charity’s reserves policy should be informed by an appropriate assessment of financial risk. However, the report found, ‘The scale, pervasive impacts and rapid onset of the Covid-19 crisis are beyond the scope of many charities’ assessment of risk. This increases charities’ financial vulnerability: in the present context, the level of reserves held by many charities may not be sufficient to ensure service continuity.”
Professor Mohan said:
“Charities face a difficult balancing act in taking decisions about reserves. They face great pressure to spend the money they have been given but they also need to ensure that they are in a position to withstand financial shocks. The pressures of a global pandemic are placing charity finances under severe stress. Most charities have a mix of income sources, which are affected in different ways – almost all face-to-face fundraising and charity shop activity being especially hard hit. It is particularly unfortunate that they are likely to be more vulnerable financially precisely at the point where expectations of their contribution have never been greater.”
The research was funded by the Economic and Social Research Council as part of the UK Research and Innovation call for studies that can contribute to understanding and alleviating the social impact of the pandemic. The project is a collaboration between the universities of Birmingham, Southampton and Stirling, and the National Council for Voluntary Organisations (NCVO).
Ecclesiastical’s research into charity reserves
Similar research by Ecclesiastical Insurance confirmed that many charities have very limited reserves.
The research by YouGov involved 250 charities. Almost half (47%) of charities surveyed said that they expect their reserves to run out within the next year.
In particular, 12% of charities expect their reserves to run out in the next three months, rising to 17% within the next six months.
Earlier this year the Charity Commission published figures showing 5,843 charities were forced to close between April and June, up from 4,900 the previous year, an increase of 19%.