The Covid-19 pandemic has been a tough time for many businesses and organisations, and charities have also taken a major hit from the double whammy of increased demand for their services and a drastic fall in their ability to undertake traditional fundraising activities.
And now we are seeing government support reducing; the furlough scheme, which has been a lifeline for many charities, is being wound down; Covid loans are becoming due for repayment, or at the very least starting to attract interest payments; and emergency government and local authority funding are coming to an end.
A report produced by NCVO in conjunction with Nottingham Trent and Sheffield Hallam Universities showed that 46% of charities have had to dip into their reserves to stay afloat in the past year.
You could justifiably argue that this is exactly why charities carry reserves – the proverbial rainy day fund – but the report goes on to say that in many cases, those reserves are now starting to run dry.
As we emerge from Covid (hopefully), trustees need to take a long, hard look at their reserves policy in the light of a crisis the extent of which few could have predicted – and decide whether they need to be amending that policy to ensure the charity is financially robust enough to weather any future storms.
As a rule, charities are truly excellent at managing costs and delivering excellent services on limited resources. Trustees play a large part in ensuring that such organisations are governed in a financially responsible way. But not even the most diligent and competent trustees could have foreseen the severity of the crisis which has engulfed the world in the last 18 months. Now that we have experienced that tempest, trustees need to be reassessing what contingency funds their charities need to be carrying.
The amount of funds carried in reserves varies from organisation to organisation, but for those employing staff, it’s usually between three and six months’ income. Until now this has been seen as a prudent benchmark to enable charities to overcome unforeseen hurdles, without being accused of sitting on too big piles of cash which should be being used to fulfil their charitable objectives.
Another factor to be taken into consideration is that many trust and foundation funders will look for resilient charities and are often reluctant to support charities they see as being ‘too cash rich’ – and unrestricted free reserves are often the metric used for making that assessment.
However, Covid has changed much of that mindset. Financial sustainability has crept up the list of desirable characteristics when funders are looking at bids, and there is an acknowledgment that charities may need to be holding a bigger contingency fund than they might have done before the pandemic, a willingness to de-restrict funds allocated prior to Covid, and an increased tolerance of higher levels of unrestricted reserves.
As we come out of Covid, there are two key tasks that every trustee needs to be undertaking. The first, and most urgent, is to be working out a way of replacing any reserves which have been drawn down to keep the charity afloat in these difficult times. That in itself is not an easy task, but realistically, good governance suggests that it should be undertaken before expanding services or resuming activities which have been paused during the pandemic.
The second, and equally important, priority is a review of the charity’s overall reserves policy in the light of the pandemic, assessing whether the level of reserves stipulated in the policy is in fact sufficient. That will require an in-depth understanding of the organisation’s ongoing financial commitments and strategy, and probably some difficult conversations with its executive team.
Hopefully the storm we have just weathered will be the most severe any of us will experience in our lifetime. If nothing else, it has shown us the importance of that ‘rainy day’ fund, and every charity trustee should have this at the forefront of their minds right now.