Building financial reserves as we recover from the current financial crisis

Currently, the UK’s international development sector is experiencing a perfect storm: dropping public fundraising, continuing lack of clarity over Brexit, the UK’s economic downturn, challenges to international NGOs’ operating models and the UK government’s latest round of harsh cuts to development programmes across the sector.

As organisations grapple with grant cuts and other financial pressures, financial reserves and building sustainable income streams are more important than ever, especially as organisations consider new financial strategies for the future.

NGOs’ attitudes and approaches to reserves

Even before the Covid-19 crisis and the latest round of cuts to the UK aid budget, our research with chartered accountants and tax advisors haysmacintyre found that UK charities working in international development had lower levels of reserves than domestic charities. From a sample of 156 organisations, the mean level of unrestricted reserves was 11 weeks of total spend, with a median of 8 weeks. Having reserves below eight weeks may make it difficult for an organisation to survive a financial shock.

This may not be the most obvious time for organisations to be thinking about growing reserves as the focus may well be on survival. But it is still a good time to think about the future financial structure of an organisation, as it will be easier to change priorities as growth returns. As organisations get used to reduced spend, eventually they will need to decide what to do with extra income as it begins to recover. There is a strong argument for prioritising reserves, including for partner organisations. Part of working out what to do is to is in understanding what the barriers to building reserves are.

Barriers and opportunities

From our study, the three biggest barriers to running surpluses and building reserves cited by organisations were:

• lack of opportunity or limited resources (mentioned by 64% of organisations)
• attitude of donors (46%)
• organisational culture inhibiting running surpluses (36%)

The two main opportunities of running unrestricted surpluses come from either individual giving from the public or from achieving a good cost recovery from a restricted grant. The former income is usually entirely unrestricted and can have a low fundraising cost and so naturally yields a good surplus. The latter can come from either having a good headline overhead rate or from budget substitution of previously unrestricted funded costs. The attitude of the donor is big factor of course. This has been a feature of some previous blogs.

The area that links all these together is the organisational culture potentially inhibiting running surpluses. This is the area that is mostly clearly a choice. One organisation in the study described the problem as “in-built resistance to cost management and reduction from certain key parts of the organisation”. In other words, there needs to be an active choice to want to put money into reserves as opposed to other options such as programme costs or investment.

Building reserves is a delicate balancing act, with donors, trustees and organisational staff all keen to spend money directly on programmes as efficiently as possible without compromising the resilience of the organisation. As the median reserves levels in the sector prior to the arrival of the coronavirus was eight weeks, it’s evident that many organisations’ opinions were to not invest in the reserves.

Our sector needs to have higher levels of reserves to have greater financial resilience, be prepared for the next shock that comes, and have the funds that enable it to invest, be strategic and adapt its business models. Amongst today’s intense pressures and grant cuts, organisations should be preparing now, as many decisions about cost cutting have already been made to cope with the current crisis. As income recovers, rebuilding of reserves to levels greater than they were before the crisis should be a priority.

How do you prevent an organisational funding crisis? Get ideas to adapt your organisational model and fundraising strategy to build a strong and resilient organisation at our Bond Conference session on 24 May.