What do we know about charities’ reserves?

Part of Kids Company’s downfall seems to have been its hand-to-mouth operating model. It was unusual in having a commitment to meet all the need it found, and then try to work out how to meet the costs later. Most charities aren’t in a position to do this. Kids Company hence spent virtually all the money that it received in almost every year of its existence. In other words, it wasn’t saving for a rainy day. It didn’t have the cash reserves that charities need in order to see them through rough patches, or to act as a cushion should they need to wind down. Charities are expected by the Charity Commission to set out their policy on their reserves in their annual reports. Good practice is to hold several months’ operating costs in reserve.

A lack of reserves, combined with what you might call a ‘lumpy’ funding profile – characterised by intermittent large donations or grants – is a very high tightrope to walk. Most charities would seek to avoid this.

That said, it’s not easy for a charity to build up reserves. Margins on public service contracts are frequently slim to non-existent, and donors often (unfortunately) object to donations being used on what they see as an ‘overhead’. It takes conscious effort on the part of managers and trustees to ensure they are saving rather than spending all their income on what they see as pressing needs or opportunities in the present.

But how common is it to have low reserves?

The Almanac gives some basic statistics on the reserves that charities hold. Our estimate is that charities’ reserves are collectively worth around £49 billion. This is equivalent to around 15 months of spending – so with no incoming resources the sector would be able to survive at current spending levels for just over a year by using its reserves

This is a sizeable sum, but the aggregate figures hide a lot of variation – reserves aren’t distributed equally. A large amount of reserves are held by a small number of grantmakers. Removing the reserves of 15,000 foundations brings the total for the remaining “operating” charities to £20 billion, equivalent to 7 months of spending.

Some parts of the sector have even fewer average reserves. Umbrella bodies and international organisations have an average four months’ spending in reserve, advocacy and cultural organisations just five. Social services organisations – our largest category – also have five months’ spending in reserve.

Average reserves of voluntary organisations by subsector, 2012/13 (months of spending, 10 lowest subsectors)
Umbrella bodies 3.7
International 3.8
Law and advocacy 4.6
Culture and recreation 5.2
Social services 5.3
Playgroups and nurseries 5.6
Education 6.6
Environment 7.7
Employment and training 8.5
Development 9.2

But these (mean) averages still hide the distribution and the large numbers of organisations with low reserve levels. Looking at larger organisations (those with more than £500,000 annual income), the median level of reserves is three months.

This means that half of these charities (around 3,800 out of 7,600 organisations) have less than three months spending in reserves, generally thought of as a guideline amount (although the reserves needed by any individual charity will vary, and will be based on a reserves policy they have developed according to their needs).

One fifth of these largest organisations (1,500 charities) have less than one month of spending in reserve, while 450 of those large charities – over one in twenty – say they have no reserves at all. In addition, we estimate that a further 31,000 smaller charities (those with less than £500,000 income) also have no reserves – around 25%. But for smaller charities reserves are often less important – for those without staff to pay or significant creditors the financial impact of closure is more limited.

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David Kane David Kane, NCVO’s Senior Research Officer, discusses open data and emerging trends in the voluntary and community sector and wider civil society.

9 Responses to What do we know about charities’ reserves?

  1. Steve Morton says:

    We would have asked Alan Yentob to stand down. He has a lot to answer for as their Chairman in Kids Company’s demise. Financially illiterate at best, asleep at the wheel at worst.

  2. Stephen Petter says:

    I am surprised your analysis by Sector did not identify “Religion”.
    Is it included in “Culture”?

    • David Kane David Kane says:

      Hi Stephen – I only included the ten categories with the smallest reserve levels, religious organisations are in their own group, but it’s one of the higher reserve levels.

      When I’m back in the office on Monday I’ll find the figure.

  3. Hopefully some good will come from this, not least funders understanding the need for reserves. We have found that having reserves can be a hinderance to accessing funding. Some funders state they have charities without reserves and therefore their needs are more pressing than ours as we do have some reserves. It is a fine balance between ‘squirreling’ away money and spending it on the needs of the charity and the people they work for.

  4. Brian Seaton says:

    I agree with Steve Morton.
    Charity trustees have a legal obligation to ensure that their charities remain financially viable. That Kids Co could “go to the wall” so quickly is prima facia evidence that they failed dismally in that obligation. And, most importantly, their failure has rebounded in the most unfortunate way on the vulnerable young people they were purporting to be helping.
    The Kids Co explanation that “it wasn’t their fault – it was the fault of funders for not giving them the money they required” is plain laughable. There are dozens (no probably hundreds if not thousands) of small charities up and down the country that could use the same “excuse” in today’s climate of cutbacks but aren’t attracting the same headlines, and therefore “sympathy”, as someone who has the ear of the Prime Minister.
    And while we’re on it – what about the role of David Cameron, pumping £3m of public funds into a failing charity only to see it “go down the drain”? If “government” were a charity (it is, after-all, supposed to be a not-for profit organisation for the public benefit) he would be one of its Trustees and therefore personally liable for failing to apply “due diligence” by allocating donors’ (ie: tax payers’) funds to a failing cause against the explicit advice of a senior professional member of the “charity’s” staff.

  5. Sam Field MBE says:

    I was a consultant to charities (approved by NCVO!) 1986 – 2003, preceded by a long period of employment in charities and succeeded by a period of charity and non-profit trusteeship which still continues.

    Kids Company’s financial problems were real and should have been foreseen by the finance controller (and auditors) long before they became serious.S/he should have advised the Board who should have acted. More likely s/he did advise, and the charismatic founder and her cronies did not wish to hear.

    It seems they didn’t want to hear in other areas as well, and that Kids’ Company’s problems were not only financial, but were also attributable to not wishing to listen. I won’t enjoy the subsequent media revelations – I’ve seen too much of this kind of thing and its wastage of talent, aspirations, and vulnerable lives,and resulting damage to the reputation of the voluntary sector.

  6. Joanna Boyd says:

    I am new to this sector but come from a financial background, we reviewed the Kids Company Accounts as a case study from 2003 as part of a course and were all surprised that the auditor did not qualify them back then as well as shocked at the laissez-faire attitude of the management/Board/Auditors towards their financial situation. It seems a charismatic Chief Exec combined with good connections kept the boat afloat far longer than was justified.
    I am deeply sorry for the children and employees who have suffered from this lack of professionalism and ego driven leadership.

  7. Ron cowley says:

    lack of understanding or control from the board allowed the charity to run out of control.. What happens to the Chairman and the NED,s not for profit doesn’t mean charities have not got to be fiscally competent….