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.
|Law and advocacy||4.6|
|Culture and recreation||5.2|
|Playgroups and nurseries||5.6|
|Employment and training||8.5|
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.