Many charities have low levels of reserves says a new report which highlights how for just over one-fifth of charities, reserves were equivalent to less than one month of expenditure.
Charities that have been in existence under 25 years has around three and a half months expenditure in reserve.
The research led 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 12700 English and Welsh charities for financial years ending in 2018 or 2019. They found that many charities have low levels of reserves: for just over one-fifth of charities, reserves were equivalent to less than one month of expenditure. Around 10% of charities had a few days reserves, or less.
The report titled "Assessing the financial reserves of English and Welsh charities on the eve of the Covid-19 pandemic," also found some charities operating in certain fields of activity – culture and recreation, employment and training, and social services – seem more likely to have low levels of reserves (typically under 4 months of expenditure).
Charities established in recent decades are more vulnerable. The study found that charities that have been in existence for over 50 years typically held reserves to cover running costs for over 6 months, whereas other charities that have been in existence under 25 years has around three and a half months expenditure in reserve.
Charities whose principal income source is sales and contracts for delivering services appear to have lower-than-average reserve levels. These are organisations who are likely to be on the frontline of responding to rising social needs.
Charities based in different regions of the country have different levels of reserves. 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%).
Co-author of the report, Professor John 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.”
Prior to the breakout of COVID19, British charities were strengthening their reserves in the ten years prior to 2019. However, the report concludes the present situation actually poses major challenges. The needs of the COVID19 pandemic will force many organisations to draw more substantially on their reserves.
The research is 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).
A project briefing paper is available online.
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