More than one in five charities have less than a month's financial reserves, research finds

More than 20 per cent of charities have less than a month’s worth of expenditure in reserve, new research has found. 

A paper by David Clifford of the University of Southampton and John Mohan of the Third Sector Research Centre at the University of Birmingham says that of the approximately 12,700 charities in England and Wales studied, 21 per cent held less than one month’s spending in reserve. 

About 10 per cent of charities in the sample held virtually no reserves, the paper says. 

It found that 33 per cent of the organisations studied, which have annual incomes of at least £500,000, held less than two months’ expenditure, and 43 per cent had reserves accounting for less than three months’ spending. 

“A significant proportion of charities report having virtually no reserves: the 10th percentile of the reserves distribution is 0.02 months of expenditure,” the report says. 

“The 25th percentile is 1.32 months. The median charity has 3.92 months of reserves. 

“So even among these larger organisations, which all have an income of at least £500,000, nearly one quarter could only operate for approximately five weeks solely on the basis of their reserves.”

Researchers found that at the other end of the scale, 10 per cent of charities had at least 41 months’ expenditure in reserves. 

The paper concludes that charities with annual incomes of between £500,000 and £1m were “slightly better placed than the very largest organisations”. 

Perhaps not surprisingly, longer-established charities tended to have higher levels of reserves, the paper says. 

These levels were generally lower among organisations whose main income source appeared to be reliant on the sale of services and contracts, rather than on fundraising or donations, it says. 

“The most notable feature of the analysis is the consistent evidence, across age, size and subsector of organisation, that a significant minority of organisations have very limited reserves,” the report concludes. 

“Initial findings from other work we are doing on reserves – not shown here – suggest that the reserves position of charities had gradually improved in the 10 years after the financial crash of 2008/9. 

“The present period is a much more substantial economic shock than that of a decade ago, and we would anticipate that reserves will be drawn upon by charities to a degree to sustain their activities. This is also likely to mean that restoring a resource buffer that will insulate charities against future adverse events will take time.”

The data, which is drawn from annual returns submitted to the Charity Commission, is based on the financial years ending in 2018 and 2019. 

The paper also cautions that there are variations in the interpretation by charity accountants of what constitutes funds that are freely available for use, which might affect the consistency of reporting to the regulator.

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