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Charity reserves were falling before pandemic hit, BDO survey shows

16 July 2020

Some of the UK’s largest charities were ill-prepared for the financial impact of COVID-19, holding lower levels of reserves than in previous years, a new report from accountancy and advisory firm BDO has found.

According to BDO’s latest review of the reserves held by the UK’s top 50 charities, charities were found to hold an average of just two months of reserves going into the pandemic, down from three months when the firm last carried out its survey in 2017.

Charity free reserves are fundamental to good financial management and governance, and enable charities to protect themselves from major risks such as the unforeseeable loss of income, reputational damage or the costs of fires or theft. They are also used by charities, funders and stakeholders as a measure of financial health.

Early indications suggest that COVID-19 has decimated charity income, with fundraising events cancelled and the charity retail sector forced to close during the lockdown. Donations are also expected to decline as unemployment rises.  

The latest research from the Chartered Institute of Fundraising and the Charity Finance Group found that charities are now expecting income to fall by almost a quarter (24%), equivalent to a £12bn loss. This has led to many charities having to rely on reserves at a time when demand for their services has risen.

BDO also found that charities are struggling to accurately report their reserves and comply with regulations. Its analysis of annual reports revealed that around 30 per cent of the charities surveyed made no reference to the level of free reserves held, indicating non-compliance with the Statement of Recommended Practice (SORP).

While the charities stated their general free reserves totalled £3.8bn, BDO’s review found significant variations in methodologies for calculating reserves. It concluded that the real figure, to reflect actual undesignated, liquid assets, was just £1.5bn, £2.2bn less than the charities reported. This was largely as a result of the exclusion of fixed assets which accounted for £2bn of the discrepancy.

Commenting on the findings, Jill Halford, BDO’s National Head of Charities said:

“The impact of COVID-19 has been a wake-up call for charities, and brought into sharp focus the importance of having sufficient free reserves as a protection from income shocks. The fact that reserves were falling prior to the pandemic should be a particular cause for concern, and will no doubt lead many charities to revisit their reserves policies.

“In our review, we found notable areas of non-compliance, which may partly reflect a lack of clarity and specific guidance on how to identify and report free reserves. We would urge the Charity Commission to address this at the earliest opportunity to help charities to protect themselves both during the current crisis and beyond.”

Further details on BDO’s review of charity reserves can be found here.  

ENDS

Notes to editors

BDO has carried out research on charity free reserves every two years since 2013. This is the firm’s fourth review, which looked at annual accounts of the UK’s 50 biggest charities’ 2018/19 annual accounts. For the purposes of this review, two grantmaking charities - Wellcome Trust and the Children’s Investment Fund Foundation UK - were excluded from the research so their size did not distort the overall findings.

About BDO

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