A TFN investigation of the amount of money Scottish charities have in the bank uncovers a particularly tough challenge in maintaining reserves
Two thirds of Scotland’s biggest 40 charities have less than three months running costs in reserve, new research has revealed.
A TFN examination of the 2014/15 accounts of Scotland's largest 40 organisations including social care bodies, housing associations and household name charities shows the sector is struggling to maintain high levels of funds in reserve.
Reserves are money charities have in the bank to help cover the costs of emergencies, plan for the future or develop new services.
It is a challenge for all organisations in the current climate to balance expenditure of charity finances with a strong reserves policy and the rising costs of delivering the living wage to a quality social care workforce on an ever decreasing income line
Focus was placed on levels of reserves after the collapse of London charity Kids Company last year where it was revealed that it had only one week of running costs left. This meant staff lost their jobs without redundancy.
According to the annual accounts of Scotland’s biggest charities, at the end of March 2015, 16 had less than three months of operating costs in reserve, four had less than two months and six had less than one month of funds in reserve.
At the other end of the scale, seven charities had over 12 months of cash in the bank, which suggests they could be hanging on to money that should be spent.
Several of the organisations with lower levels of reserves are social care bodies, which often struggle to persuade local authority funders to cover the full cost of the services they provide.
A senior spokesperson for Enable Scotland said it had already increased its reserves in the last few years and had a policy to try to build them up even further.
The spokesperson said: “Our board and executive team are fully aware of our reserves position, and manage this on a regular basis. Our strategy for the next two years focuses our renewed board and executive team to build up our reserves, and review our existing policy.
“It is a challenge for all organisations in the current climate to balance expenditure of charity finances with a strong reserves policy and the rising costs of delivering the living wage to a quality social care workforce on an ever decreasing income line."
New accountancy laws mean that pension liabilities (the amount charities owe to expensive final salary pension schemes) have to be made more obvious in their financial accounts. This also means that for some charities their reserves may look considerably smaller than they did previously.
Gordon Laidlaw, director of finance for Scottish Autism, said Charity Commission guidance, which is also promoted by the Office of the Scottish Charity Regulator, suggests pensions liabilities be excluded when a charity calculates its free reserves.
He said: “That’s what we do in relation to our reserves policy and on that basis we meet our three months of operating cost free reserves target. That is not to understate the importance of managing our pension risk but it is seen as longer term, separate from reserves cover for a rainy day and to support development."
He added: “However reserves are calculated and however big they are, the pressures on funding in the sector have been substantial for a number of years and continue to be so. Providers are doing their best to recognise this but can only squeeze out so much cost while becoming more effective -there has to be a limit on how far they can go on the cost side.”
Discussing the issue, Ben Eyre, acting head of charity advisory and programmes at Charities Aid Foundation, also said there could be a range of reasons why charities have low reserves.
“The level of reserves really does depend on the organisation and the nature of the organisations and its income. It’s so hard to generalise about what the required level is.
“It’s vital to have a policy and to be as active as possible in terms of managing that policy in terms of keeping it up to date and working towards it. But the nature of that policy would be very different for a charity with a huge endowment, or one that relies on a wide range of funders to one that has a very small number of contracts.”
He said that charities where actual reserve levels fall short of their policy, should be actively monitoring the situation and working towards a remedy. However, he said he didn’t believe that there is an overall problem with charity reserves in Scotland.
“Charities are taking their reserves policies more seriously, partly because of the increased attention to it,” he said. “More of our clients are talking to us about this and more people are attending workshops and seminars about reserves. What’s really important though is that more people, whether that’s charities themselves or funders, are acknowledging that reserves are important. They realise that organisations can and need to demonstrate how an appropriate level of reserves is important to achieving their mission.”
