Invest in the rest

Walk into the offices of most charities and you’re unlikely to find
a copy of the Financial Times. Checking up on the state of
the stock market is not on the agendas of most charity workers.

Yet, among the 200 or so charities with annual incomes of more than
£10m, the Financial Times has become compulsory
reading. The stock market slump since 11 September wiped an
estimated 10 per cent off charity funds, equivalent to about five
years’ capital growth. With the additional impact of interest rates
being at their lowest since the 1960s and the removal of advance
corporation tax credits, many charities with long-term capital
investments face an uncertain future.

Charities can have been left in no doubt about the importance of
getting their financial houses in order. Many are being forced to
think more carefully about how to invest their assets to generate a
more stable and sustainable income.

And while the ups and downs of the stock market are of direct
concern to a tiny minority of charities, the impact is
disproportionate. Investment income directly benefits less than 1
per cent of charities, but now accounts for one quarter of the
sector’s total income. And the stock market losses of those who
fund the sector are having a direct impact on charities of all
sizes. Corporate donations, legacies and grants from trusts and
foundations have all been affected.

Nevertheless, while finance directors are learning about the
relative virtues of investing in property, hedge funds, bonds or
gilts, most of the sector is preoccupied with more mundane finance
matters – chief among which is how to cover basic running costs.
The gaps between the haves and have-nots could not be more stark.
While relatively few charities are puzzling over how to make the
best of the money they have accumulated, the rest are trying to
figure out how to simply make ends meet. And, as government
increasingly looks to the not-for-profit sector to help deliver
improvements to public services, the capacity of the sector to
respond is being undermined by the inability of more than a
minority to move beyond a hand-to-mouth existence.

Three in four charities have an annual income below £100,000.
Most small and medium-sized charities are forced to sail close to
the wind financially just to keep going. The idea of being able to
amass some reserves to cushion the impact of cash flow or even
provide some unrestricted funding is but a pipedream. The prime
concern is how to ensure that core costs – the rent, salaries and
utility bills – are sufficiently covered. Core costs are always the
most difficult for which to fund-raise. Charitable trusts are
notoriously cautious about paying more than basic overheads and
those charities that generate income by providing services are all
too aware of the fact that contracts are usually awarded on the
grounds of cost-effectiveness. Demonstrating that you run the
charity on few resources is a sure way to make your bid
successful.

Yet accumulating some level of savings is vital for all charities.
The Charity Commission acknowledges that limited or non-existent
reserves risk insolvency, hamper medium-term planning, create
insecurity for beneficiaries, supporters and employees, and can
force charities to disrupt or abandon aspects of their work when
income drops unexpectedly.

While the benefits of even small reserves are clear, there are
forces discouraging saving. Some donors and charitable trusts
question the efficiency of organisations that continue to
fund-raise when there appear to be unallocated resources in the
bank. Meanwhile, the gap between the haves and the have-nots
widens.

In a climate in which the sector’s input into public services is
increasingly welcomed and social enterprise encouraged, innovation
is unlikely to thrive with such financial precariousness.

The viability of the sector rests on building greater capacity to
prevent a growing divide between those that take advantage of new
opportunities and those that simply cannot afford to raise their
eyes from this month’s balance sheet. The £125m allocated in
the recent spending review to modernise and build capacity in the
voluntary sector is a welcome recognition of how vital investment
is in the sector’s infrastructure. Without it only the big guys
will prosper.

Lisa Harker is deputy director of the Institute for Public
Policy Research.