Enough in reserve?

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The Covid-19 crisis has put, amongst many, many other things, the financial stability of voluntary and community organisations in the spotlight. Good practice means organisations should hold an appropriate level of funds in reserve to help them cope with the unexpected and if necessary safely wind up the organisation – ensuring at least all liabilities and debts are paid off.  The Charity Commission provides fairly detailed guidance on reserves but above all emphasises that trustees should have a reserves policy. A reserves policy needs to be based on an informed view of the organisation’s finances and the risks involved.

It is fairly common for organisations to aim to have at least a quarter’s running costs as their reserves policy. In my view, this is a minimum threshold for most small and medium-size organisations. But we know that many are well below this level. Remember that’s just 12 weeks! A recent VCSE survey in Somerset (https://sparksomerset.org.uk/news/StateoftheSector) revealed that around one quarter of responding organisations had reserves at or below this level. And a survey by South West Forum in 2016 reported that almost half of those surveyed felt their unrestricted reserves were “unsafe”.

It’s probably fair to say that few people in the voluntary sector ever contemplated the possibility of a sudden and prolonged halt to earned income as has been brought about, for many, by the Covid pandemic. Loss of grant income and contracts – yes, but generally these come with a bit of notice. Income from public and community fundraising may decline, but rarely falls off a “cliff edge”. Events like fires, floods and theft can of course have a massive impact but insurance and the goodwill of funders, individuals and the local community can often help stop the organisation going under.

Ironically, it may be that organisations most dependent on grant funding and contracts have been able to weather the Covid 19 storm better than those reliant on trading income and fundraising – a source of funding which for some has pretty well dried up.   Many grant funders, local authorities and other public agencies have been quick to respond giving grantees considerable flexibility to re-think their activities and reallocate resources – in some cases being given the scope to do what they think is appropriate. And, of course there have been a plethora of new funds and grants schemes to help organisations respond to the Covid crisis, with the government also providing additional funds to support the sector.

The Covid 19 experience is highlighting in a way that few of us ever envisaged that we should not keep all our eggs in one basket. We need a “mixed-economy” of funding streams and to spread the risk. It may be that the push over the past few years for income generation, trading and business models may now be tempered with a little more caution.  Perhaps Covid has helped demonstrate the flexibility, responsiveness and efficiency of good old grants. And maybe it also requires the sector, funders, investors, the Charity Commission and other stakeholders to take a step back and consider whether our traditional approach to building and managing reserves continues to be appropriate in what may be a more volatile and uncertain world.