A robust response?
Mark Pincher looks at the expenditure and reserves of the UK’s largest charities in the context of the external environment
An analysis of expenditure can be an indicator of financial health. Sufficient resources must be available to approve levels of spending. Reserve policies are implemented to ensure organisations are managed efficiently and to safeguard financial stability so that longer term charitable activities are not threatened [1]. Such policies restrict expenditure to ‘safe’ levels and therefore protect reserves so that financial health is maintained. An insight into the expenditure of major charities can show how these organisations are bearing up in these difficult times. It can show how certain charities are maintaining charitable activities with no effect on reserve levels, how cautious the sector is being by restraining total expenditure, but conversely how some charities have suffered to some degree and fallen victim to the current economic climate.
Expenditure of the top 5,000 charities in the UK
- £24.1bn (69.9 per cent) spent oncharitable activities.
- £5.9bn (17.2 per cent) spent on grant distribution.
- £2.2bn (6.5 per cent) spent on merchandising and income generating activities.
- £1.2bn (3.6 per cent) spent on fundraising.
- £0.5bn (1.3 per cent) spent on governance.
- £0.2bn (0.6 per cent) spent on investment management costs.
Charitable activities (including grant making) account for 87.1 per cent of all expenditure. Taking inflation into consideration [2] , overall expenditure increased by 3.1 per cent over the previous year and changes between the types of expenditure show that:
- Charitable activities increased by a real 3.1 per cent.
- Grant distribution increased by a real 3.6 per cent.
- Merchandising and other income generating activities increased by a real 3.3 per cent.
- Fundraising costs increased by a real 2.5 per cent.
- Governance increased by a real 1.6 per cent.
- Investment management costs increased by a real 1.9 per cent.
Therefore the largest increases were seen in grant distribution and income generating activities. But a 3.1 per cent real growth in total expenditure is a cautious growth rate and
reflective of the current climate.
Growth of charitable expenditure 2004 to 2008
The good news is that there is little sign of the sector actually shrinking in terms of financial support as both charitable activity and grants expenditure have grown year-on-year (see figure 1). The figures indicate that the aggregate level costs associated with charitable activities are still in growth.
Historic growth of the different types of non charitable expenditure
Of the different types of non charitable expenditure, income generating activities have seen the greatest increases over the period, growing from £1.6bn to £2.2bn (see figure 2). These include trading and merchandising activities, lotteries/sponsorships, charity shop and event expenditure. These costs would be expected to rise as charities embark on new methods of income generation and the diversification of revenue streams. The graphs show that fundraising costs – those costs associated with the generation of voluntary income have remained fairly constant and investment management fees have steadily increased. Governance costs have decreased, but this is largely due to changes in financial reporting whereby management and administration costs were replaced by governance following changes in the SORP in 2005.
Although figures 1 and 2 (below) show growth in levels of total expenditure, this is a simplified view of what is really happening at an individual charity level. Of the top 5,000 charities, 3,510 increased their expenditure by a total of £3.7bn; however 1,469 (nearly (30 per cent) decreased their levels of expenditure by £1.2bn.
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Expenditure and reserve levels
Aggregate reserve values from 2004 to 2008 show that after growing consecutively from £89.2bn in 2004 to £96.6bn in 2007, they actually fell in 2008 back to £91.6bn as figure 3 below shows. Reserve levels fluctuate year on year for all charities. Such fluctuations can be caused by a multitude of factors but two main reasons for changes in reserve values are movements in total income to expenditure ratios, or external economic forces which can affect the value of assets. If a charity spends over the course of a year more than it earns there is a higher risk of the organisation eating into its reserves.
- influencing the value of incoming resources; and
- affecting the value of assets whereby expenditure has to be restricted so that assets are protected.
The latest financial data on the top 5,000 charities indicates:
(1) Of the 1,469 charities that decreased expenditure (29 per cent), around half (753) increased their reserve levels. This is evidence of financial stability yet also displays caution in these economic times.
(2) The remaining 716 that decreased expenditure also witnessed a decrease in reserve levels. So it can be assumed that the reduction in spending was a measure to protect reserve levels.
(3) Of the 3,510 (57.6 per cent) that increased their expenditure levels, 2,023 increased their reserves with values displaying clear financial health and stability. Conversely, 1,487(29.7 per cent) increased their total expenditure but saw a fall in reserves. In total these charities saw their reserves collectively fall by £4.7bn.
Examples of charities that increased expenditure and a growth of reserves include:
- The British Museum increased expenditure by £3m and increased reserves in excess of £21m.
- The V&A increased expenditure by £1.5m and increased reserves by £34m.
- The National Trust increased spending by £38.6m and reserves by £56.8m.
- The Robertson Trust increased spending by £1.3m and reserves by £19.9m.
- The Garfield Weston Foundation increased expenditure by £11.9m and reserves by £32.3m,
It can usually be assumed that external economic forces are to blame for negative reserve growth, illustrated by those charities which have much of their asset base in the form of investments. However, Paul Palmer in his article ‘A sure foundation’ highlighted a report by the Institute of Philanthropy which had criticised the investment performance of the grant-making sector early in 2008, where reasons for collective poor performance included investment committees not being ‘up to the job’ and ‘a perception that the sector rarely seeks out competitive tenders, reviews investment manager or seeks independent advice’. A year on, the need to find solutions to external problems may well present a different picture.
Of those charities that increased expenditure and witnessed falls in reserves, those most affected tend to be the extremely large grant making organisations.
And of the £4.7bn fall in reserves mentioned above, £1.8bn of this was due to the fall in value of investments belonging to the Wellcome Trust. This organisation in their annual accounts highlight how the ‘depth of the financial crisis has exceeded our expectations. In 2007/08, we suffered a negative return of 11 per cent compared with a 16 per cent negative return for global equities and a 21 per cent loss for UK equities’. Other grant makers with massive investments have also fallen victim to falls in the investment markets, namely The Leverhulme Trust, The Joseph Rowntree Foundation and the Linbury Trust to name but a few.
The 753 charities that decreased expenditure but saw their reserves increase could be described as cautious. This group also contains some of the major museums. The Natural History Museum decreased expenditure by £2.1m but increased reserves by £39.7m. The National Gallery decreased expenditure by £1.3m and increased reserves by £23.5m. Other examples include the Peabody Trust, the Health Foundation, Action for Children and The Helping Foundation.
The final group made up of 716 organisations decreased their expenditure and experienced a reduction in the value of reserves. These could be described as being protective, reducing levels of expenditure to minimise eating into their asset base. Many of the large grant makers are in this category also where their investment values have dropped causing the value of reserves to fall.
The Tudor Trust reduced expenditure by £2.8m but assets plummeted by £68.3m. Esmee Fairbairn Foundation slightly reduced expenditure by £1.1m but saw reserves fall significantly by £212.9m. Even the UK’s largest fundraiser Cancer Research UK reduced expenditure by £77.3m but saw reserves fall by £30.1m.
Outlook for recovery
By measuring expenditure we can assess the ability of charities to financially execute their charitable activities. Bringing reserves into the equation it is possible to measure the impact of carrying out these activities within the backdrop of the current economic climate. The recession is affecting charities at varying levels and those holding massive investment assets have lost the most through revaluations. On face value 40 per cent of the top 5,000 charities have increased expenditure and reserves and are therefore carrying out their activities comfortably despite the external environment. Only 14 per cent saw decreases in expenditure and reserves at varying levels. Revaluations of investments have written off millions from the balance sheets of many charities, affecting income while the recession continues. Charities with huge investments have lost the most, but they are in a much stronger position financially than a very small charity and, when the markets bounce back, they will stand to gain the most when those revaluations become positive.
Author: Mark Pincher
Mark Pincher is data editor and development manager for Caritas Data.
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