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22 September 2021    |    Blog

Charity Finances – Walking the Tightrope

It often feels like charities need to engage in a finely tuned balancing act – being able to demonstrate a compelling enough need for funding whilst presenting a sufficiently reassuring picture to convince funders to commit their money. Is this a contradiction?

One question that often presents a dilemma for charities is what is the optimum level for their financial reserves. Levels of reserves relate to many aspects of running a charity but it’s a question that often crops up in relation to funding and the impact it can have on decisions made by funders.

Whilst it can seem like two conflicting forces are at play, actually it’s a logical and reasonable approach which funders need to take. They want to allocate their limited funds to those organisations that need them the most and will make best use of them, but they also want to ensure that the charity’s finances are robust enough to be sustainable and viable in the long term.

Although many funders do not publish strict guidelines on reserve levels, some state they are unlikely to fund organisations that have reserves higher than 9 or 12 months’ operating costs, others have criteria which are as low as 6 months. In an ideal world, personally I would come down on the 4-6 months range as the place you want to be – but unfortunately we don’t live in an ideal world. While many charities’ reserve policy aims for a minimum of 3 months’ operating costs, in reality many do not achieve their own policy and funders do still support and commit to their work. Communication and being able to explain the reason for reserves being lower – or higher – than perhaps expected, is crucial.

And what about the impact of Covid on the balancing act? There is no doubt that the effect of the pandemic has hit many charities hard. Yes, substantial levels of emergency and recovery funding have been made available, and along with Government support schemes, this has all helped steady finances, but lots of charitable organisations have still needed to deplete their reserves. The events of the last 18 months has made the picture for many charities precarious, even perilous. The ability to deliver services and activities in the way they had previously – so often linked to income streams for charities – stopped or reduced dramatically. Almost overnight, many charities lost what might have previously seemed reliable and guaranteed income, to be left feeling like they had actually fallen from the tightrope, only being spared from complete freefall by clinging on by their fingertips.

Despite this potentially fatal situation, throughout the Covid-19 crisis, the charity sector has shown itself to be resilient, agile and responsive to the often overwhelming needs the pandemic has presented. So, can it be as simple as coming down to funders scrutinising reserve levels and cashflow forecasts? The answer is definitely NO – the majority of funders have adapted at speed to the crisis themselves – simplifying their processes, cutting turnaround times for assessing and processing funding requests, adding more flexibility to their awards and reporting requirements. Yes, the balancing act continues for charities as it always has, but the message from funders has been it is more important to show strategic partnerships, re-establish sustainable income streams where possible, and have compelling impact reports. In short, they have become increasingly understanding of what charities have faced throughout this prolonged challenging period, but more importantly, more trusting and comfortable that charities how best how to do what they do.


Nicola McLaughlan
NM Fundraising