How resilient are English and Welsh charities to the financial effects of Covid-19?
What will the impact of Covid-19 be on charities in England and Wales?
We know that there has already been significant disruption to their ability to raise funds, whether that be through sales in charity shops, street collections, and the outdoor fundraising season: all of these have been severely affected by the lockdown. At the same time household incomes have been reduced very substantially for many people – though it is also true that large numbers of people have continued to work from home. Charities are also called upon to do more to support people and communities affected by Covid-19.
So the effects on charities of these circumstances will vary greatly, and it is still difficult to predict with certainty what the financial outcome of the present circumstances will be. As an indication of the uncertainty, estimates of total losses of income to charities range from £4Bn to £10Bn.
The situation is further complicated because charities draw on a range of sources of income and some of these are affected more than others. For instance there have been headlines about the massive threat to medical research charities consequent on their reliance on individual donations; equally, though, 2020 also saw massive donations to charities that support health care causes and health care staff.
Our project is designed to provide better evidence on the financial impacts of Covid-19 and our first briefing paper, is on the subject of the reserves held by English and Welsh charities. We used the most recent financial data from the Charity Commission, in which charities above a size threshold of £500 000 had reported their reserves for financial years ending in 2018 and 2019. This is a good indication of their position on the eve of the pandemic. We were interested in how long they would be able to keep operating if they had no income to draw on and therefore had to rely solely on reserves.
Among what are relatively large organisations we found that many had limited reserves. In just over 2/5 (43%) of cases, charities had fewer than 3 months of reserves; for 21% of organisations the figure was a month or less, and 10% of organisations had no reserves at all.
There were variations according to other characteristics of the charities. The older the organisation, the better its position. Those charities that were at least 50 years old typically had 6.5 months expenditure in reserve whereas the figure for those less than 25 years old was 3.5 months or less.
We found some variations according to the income sources on which organisations draw. It appears that organisations that draw the majority of their income from “charitable activities” – delivering services to clients, including contracts for public service delivery – typically have 3.3 months of income in reserve; for organisations whose majority income source is charitable donations and legacies, the figure is typically four months. Organisations that have a more “mixed” funding profile, with no majority source of income, typically have over 5 months reserves.
There are also regional variations, with nearly half (48%) of charities in Yorkshire and Humberside having less than 3 months reserves followed by Wales (46%), the East Midlands (45%) and London (44%).
Overall the vulnerability of organisations depends on their size, age, and their funding mix, but regardless of these characteristics there is a small minority (some 10% of organisations) that have practically no reserves.
The situation had been improving up to 2019, with growing proportions of organisations having reserves equivalent to at least three month’s expenditure. It is likely that many charities will have to dig deep into their reserves over the forthcoming months. Our evidence suggests that we should anticipate that a significant minority will face real challenges in doing so, and that building up reserves again will be an essential priority for the foreseeable future.