There has not been as dramatic an economic shock in our lifetimes as the one that Covid-19 is likely to cause. Most sectors will be hit, and hit hard, and charities will be no exception.
The Office for National Statistics suggests the pandemic could see Gross Domestic Product reduce by 35 per cent, and even factoring in the expected rapid recovery this year will probably still see the economy contract by 13 per cent.
In these rainiest of rainy days, reserves are crucial. With a lockdown in place, no definitive end date in sight and the possibility of further outbreaks until a vaccine is in place, it is likely that charities’ reserves will emerge significantly depleted on the other side. However, the time will come to begin returning reserves back to the levels they were pre-pandemic or to build a significant cushion for any future crises. And although firefighting is an urgent priority, organisations must also look to the future.
Nick Sladden, head of charities at the accountancy firm RSM, says charities should evaluate their policies, strategy, income, expenditure and cash flow when looking to rebuild in a post-coronavirus world.
This will mean fully considering all options and assets, including more extreme solutions such as mergers. Restricted funds should be examined, with the possibility of unlocking restrictions, if legally possible, to boost free reserves. Charities could also add assets that perhaps are not already on the balance sheet, which can help to build reserves on paper.
Once the day-to-day crisis passes it will also be necessary to carry out a full review of reserves policies, Slatten adds, including what new policies and targets will be required based on how any contingency funds were actually used.
“What was once a future target and an aspirational point in terms of their financial reserves might no longer be appropriate,” he says.
Necessity is the mother of invention. I think this is a challenging period, but that out of it will come some of the greatest innovation we have seen for some time from the sectorLeesa Harwood, charity sector consultant
Help for Heroes is one charity that has traditionally held substantial reserves, but now faces dipping into them because of Covid-19. The charity’s last accounts, for the year to 30 September 2019, show that it had an income of £26.9m, but spent £32.5m in 2019, leaving an overall deficit of £5.1m once gains on investments were factored in. The charity has free reserves of £12.1m and further restricted funds to help it through difficult times.
Beth Miles, marketing director at Help for Heroes, says the charity is expecting a significant downturn in income as a result of the pandemic and will need to review its three-year business plan as a result. But she says that the charity has a robust reserves policy.
“We know how we can use and spend those reserves, and we can make conscious choices to dip into reserves to continue to deliver services, even when our fundraising isn’t matching up,” Miles says. “We have thought about how long that is feasible for, and what we need to do to make sure our fundraising increases so that we don’t need to dip into our reserves over the long term.”
It goes without saying that not all charities have the luxury of relying on significant reserves. In those circumstances the furlough system, whereby the government pays 80 per cent of an employee’s wages during the current lockdown up to a maximum of £2,500 a month, could be the best way to try to mothball the organisation and protect reserves as much as possible until income returns.
At Help for Heroes, the decision to furlough 40 per cent of staff meant that reserves could be earmarked for keeping services running during a period of high demand.
“It would be quite easy to spend reserves because you have them, and you could put it into the general running of the charity,” Miles says. “However, we think that our reserves are there to deliver our services most effectively, and we will consider what opportunities there are to protect those reserves in the short term.”
The current financial landscape is undeniably a bleak one, with charity sector consultant Leesa Harwood warning that income for many charities will have been significantly hit by the loss of face-to-face fundraising. Survival will mean evaluating which income streams are more resilient than others: those that will pick up as soon as social distancing restrictions end, those that will take more time and those that might actually prosper in a pandemic.
This might mean a temporary focus on some forms of fundraising, such as digital methods, but Harwood warns that charities should not completely forget about longer-term income, such as legacies, which might be hit in the next year but will be resilient in the years ahead.
Charities should also evaluate whether certain “zombie projects” could be ended to help ease the financial strain on each organisation and allow the finances to pick up quickly after the pandemic ends.
“That will be really hard, but you risk throwing good money after bad,” Harwood says. “There is a danger you will continue to try resuscitating income streams that are fundamentally not viable and failing. This is about not investing money into income streams that will never give you what you want back.”
It’s also important that charities modernise and accept that they live in a “digital ecosystem”, Harwood says, rather than trying to replicate current ways of working through digital channels.
“Necessity is the mother of invention,” she says. “I think that although this is a very challenging period, out of this will come some of the greatest innovation we have seen for some time from the sector. Everything we do has to translate well into a digital ecosystem, not just get pushed through a digital channel.”
However charities evolve in the future, the current crisis has underlined the need for strong reserves in case of emergency. “Let this be an end to those newspapers, politicians and individuals who say that charities should have minimum reserves and should not sit on more than three or four months of them,” Harwood says.
“That kind of unhelpful comment has meant many charities have driven down their reserves and are now in dire straits.”