Despite the challenges, charities need to build up their reserves to help them weather future financial shocks and prevent programme closures and job losses, according to a new report.
The report, by Bond and haysmacintyre, warns that UK NGOs will continue to face a challenging financial future in the years ahead due to the UK’s economic downturn, cuts to the aid budget, and a potential reduction in official development assistance from 0.7% of gross national income to 0.5%.
A clear majority (85%) of organisations, the report found, state their reserves are a ‘major part of their risk management and financial resilience’. However, it also found that pre-Covid, most UK charities lacked sufficient reserves, with the average level of large charity reserves covering two months of running costs.
Barriers include lack of opportunity, and concerns over donor perceptions of large reserves. 64% of survey respondents cited ‘lack of opportunity’ as the most common issue preventing organisations from building up their reserves, while 45% were concerned about what donor attitudes would be if the organisation built up their reserves.
The report found individual giving to be the most effective way to build a surplus regardless of an organisation’s size, with 50% of respondents saying it was the best way to build reserves. 80% of smaller organisations said individual giving is one of their top surplus earners, compared to just under 40% of larger organisations. However, nearly 90% of larger organisations felt that restricted grants were a source of surplus, in comparison to 33% of small NGOs.
Graham MacKay, Bond’s chief operating officer, said:
“Given the worryingly low level of reserves in the sector, the importance of the nature of our work and the uncertainty of 2020 and beyond, NGOs must start planning for any future shocks. Charities should aim to have reserves well above eight weeks so if faced with a financial shock, they can continue to honour any programming and pay staff salaries and running costs – building reserves needs to be a financial priority for many organisations.
“Building reserves is a delicate balancing act between spending money directly on programmes as efficiently as possible and investing in an organisation’s growth, without compromising its resilience. This is something donors, trustees and organisational staff all need to work on together – especially as building reserves now will be more difficult than ever.
“Far from reserves being perceived a bad thing by donors, reserves reveal the financial health of an organisation.”