Last week the Financial Times reported on new data from NCVO (the National Council for Voluntary Organisations) showing the perilous state of charities’ reserves. Amongst charities that spend less than £10m a year, one in three have less than one month’s spending held in reserves.

NPC’s own John Copps commented in the article that, “You can’t manage cashflows like this. You never know what is around the corner. What if you are a small local charity relying on one local government contract and they decide to cancel or even delay? You haven’t got three months to wait around.”

This information demonstrates the knife edge on which the charitable sector is balanced and appears to have surprised lots of people. But it didn’t surprise me or my former colleagues at Venturesome, the social investment fund.

For nearly ten years, Venturesome and other social investors have been highlighting the importance to charities of reserves and, more widely, access to Financial Capital. Financial Capital is the money all organisations need to:

  • acquire the equipment and premises necessary to do their work;
  • manage timing differences between paying money out and getting paid for their work;
  • grow their organisations or invest in new projects and services;

and critically

  • get some insurance against the unforeseen happening, like a sudden loss of a funder after ten years’ consistent funding.

 

Rarely do donors want to fund a charity’s need for reserves. They prefer to provide money to cover on-going delivery of services, where the connection between funding and a charity’s outputs is easily understood. With the exception of giving to acquire a building or a new piece of equipment, donors have found it difficult to understand how increasing the financial capital of an organisation contributes to impact.

Yet with charities facing financial hard times where funding may be cut with one stroke of a pen or tap of a keyboard, the importance of financial capital has never been more clear. Those charities with sufficient financial capital will be better able to respond and adapt to cuts, and as a consequence will be more effective in delivering the critical services our ‘big society’ is relying on.

So now we know how vulnerable (or ‘under-capitalised’) the charity sector is, what should be done about it? In the long run ideas such as the Big Society Bank should help provide more capital.

But right now, I encourage donors to join the 10% club.

All the members have pledged to:

  • pay charities in advance not after the work has been done
  • expect charities to allow a small profit (yes that says profit) margin on their funding
  • and…pushing it a little…grant an extra 10% as a contribution to reserves.

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