Balancing reserves in the cost-of-living crisis

CAF’s Charity Resilience Index released in January 2023 indicated that 50% of charities will use their charitable reserves to cover operational costs – and this rises up to 63% in the north of England. Conversely, I’ve been hearing recently from fundraisers about the pressure they’re currently under from potential funders when their charity has a healthy amount of charitable reserves, but they’re asking for support due to the pressures of the cost of living crisis. Funders often expect that charities can weather the storm with reserves alone rather than with additional gifts, and as CAF’s research shows, a significant portion of charities are doing just that – but what happens when the storm passes?

Every charity has a different approach to managing their reserves, and of course they can be a lifeline in tough times: unrestricted funds which can be employed in any way across the organisation to cover essentials like energy bills and staff wages. But how do we ensure we can replenish them with unrestricted income when pressures ease? And should charities even sustain high levels of reserves – what are they holding onto them for?

The use and amount of charitable reserves tends to be a particular issue for high value supporters – trusts, major donors and partners – who are more likely to do extra due diligence around a charity’s finances, and may not give significant gifts until they’re confident a charity’s financial processes are robust. This can include having healthy levels of reserves, but with that comes a seemingly easy solution to urgently-needed unrestricted funds – dip into reserves. However, when you’re fundraising in a cost of living crisis, how do you balance using reserves to cover the spiralling costs of charities keeping their services running, and explaining to donors that unrestricted support is going to be the only way to replenish these funds. Will donors be willing to give an unrestricted gift in future? 

What are reserves actually for?

According to the Charity Commission, “[r]eserves are that part of a charity’s unrestricted funds that is freely available to spend on any of the charity’s purposes.” It is up to a Board of Trustees to determine how much unrestricted income is held in charitable reserves at any given point, and there are many elements to consider, including the Board’s appetite for financial risk. Besides being an important part of a charity’s annual accounts, having a reserves policy “promotes resilience…confidence…[and] compliance”.

Of course, all charities want to spend the largest amount of their funds possible serving their charitable mission. But having a reserves policy which protects the organisation from unforeseen knocks, such as a cost of living crisis or a pandemic, is not only vital for participants who might entirely rely upon a charity’s programmes; it ensures a charitable mission can continue by making sure the staff who deliver it are being paid. 

Why does unrestricted matter?

The inevitable challenge that arises in an unstable economic environment is the pressure that charities are under to spend their reserves on delivering their programmes, especially when fundraising is struggling to hit its income targets. This can lead charities to innovate with the support they provide – for example giving out grants to provide short-term support to the programme participants that need it most – but it also means that there is a further knock-on impact. Charities will need to replenish those reserves to continue to adhere to their reserves policy, and that boils down to having a robust case for support for unrestricted funding, and a strong pipeline of unrestricted donors. 

This may sound simple. In organisations with a diverse fundraising mix, unrestricted income is often underpinned by regular giving, community and mass participation events, which don’t usually have a restricted focus. But what about organisations that rely heavily upon high value gifts for unrestricted income – often to keep the charity running and provide vital support for its infrastructure?  

How do you make the case for unrestricted effectively?

This is a key opportunity to make sure that your funders and supporters don’t forget about the importance of unrestricted income to your charity’s mission – how can you possibly support those who rely upon your programmes if you can’t pay the staff who deliver them? How can you ensure that a charity is handling supporter donations effectively if you can’t pay your Finance teams, and keep your financial software running? How can you ensure you have a diverse and inclusive staff workforce if you don’t pay the appropriate wage for the appropriate skillset? And how can you guarantee the greatest impact of charitable programmes and best use of donations if you don’t have the right specialists delivering the right projects and measuring them accordingly?

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Now more than ever, after the previous few years, it’s critical that fundraisers speak openly and honestly across the sector about why funders must consider unrestricted funds as the best way to invest in charities to deliver their vital programmes. Now is not the time to ask charities to drain their reserves to cover energy bills, or give restricted gifts to keep a favoured project running. Donors need to ask themselves how they can keep charities running in an economic climate where many organisations are desperately struggling, and by trusting charities to invest their donations across their organisations effectively, they’re having the biggest impact on the people they exist to support. 

Fundraisers have the power to shift these narratives for their donors, and to achieve this, we need to not be afraid to lift the curtain on how charities operate to ensure unrestricted income continues to be a funding priority across the sector. 

I’m passionate about shifting the narrative around charity overheads and flying the flag for unrestricted income. I’d love to hear how you’re approaching this at your organisation – if you fancy a chat please do email me on hannahh@thinkcs.org. 

Hannah Hyde, THINK Consultant

April 2023

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