Charities build reserves for a rainy day - as do companies. If it is raining now, and charities (and companies) are laying off people rather than use their reserves - what were those reserves for!?
Before I set up Pareto Fundraising with Paul Roberts, I was fundraising and marketing director at Mind, a UK mental health charity. While I was there, I introduced face-to-face fundraising, which brought in hundreds of thousands of pounds.
Although it wasn't cheap my argument was simple: the return from face-to-face (F2F) activities was better than the amount the money would earn in the bank. (By face-to-face, I mean the practice of asking people for small monthly regular gifts on the street, at events and door-to-door).
Even over five years, F2F does well to make a return of more than 3:1 and it can take nearly two years to break-even. But it still hammers investment returns in the best bull market.
Other methods of recruiting new regular givers, like direct mail or online, give a superior return on investment over five years but income is harder to earn and can rarely match the volume of F2F.
I recently met with staff at a charity in New Zealand. The rather innovative finance director said that what they needed to do was to sell their property and free capital to invest in F2F. She was serious, and the CEO nodded in agreement. Her argument was the same as mine when I was at Mind - the return from F2F would be better than just leaving the money invested in property.
As well as yielding more, the risk is very low too. Now they will need to have some serious conversations with an F2F supplier and their board.
This enlightened attitude to reserves is unusual - for many companies as well as charities.
I heard of one charity cutting services and laying off people despite having very substantial reserves ‘for a rainy day' - enough to keep services going for years. It made me wonder: ‘What are reserves for anyway?'
Chatting to a few charities, I uncovered several reasons for maintaining reserves. The first two below seemed the most frequent:
1) Endowment / income generation
2) Safety net (rainy day)
3) Saving for defined future plans
4) Saving for undefined future plans
5) Protecting their independence (e.g. if government slashes funds they can carry on)
6) Meeting long-term commitments (endowed chairs at unis, specific projects, legal requirements)
7) Covering an amount sufficient to remain legally solvent and pay out all commitments upon wind-up
8) Tiding them over between events
I then asked the lovely researchers at Givewell how much charities had in reserve. (In a moment of fundraising excellence, they pointed out that if I upgraded my subscription they could send me their compiled investment report. Genius - they got my upgrade.)
The Givewell analysis of hundreds of 2008 annual reports shows that 202 non-hospital charities have investments of more than $500,000. Nearly $5 billon is invested, with another $1.5 billion held in cash.
Some of these reserves are big - the largest are held by St Vincent de Paul Society in NSW and the two Australian Salvation Armies. Between them, they reported just over $700 million in non-cash investments with three-quarters of that tied up in their properties.
Let's look at the endowment / income generation motive for keeping reserves. Many charities - especially schools, universities and hospitals - will run a capital campaign to build up a reserve fund to use as an endowment.
According to Wikipedia, "A financial endowment is a transfer of money or property donated to an institution, usually with the stipulation that it be invested, and the principal remain intact in perpetuity or for a defined time period. This allows for the donation to have a much greater impact over a longer period of time than if it were spent all at once."
Put simply, I donate $1 million and the charity invests it wisely and spends the investment returns, but leaves $1 million in the bank. Over 20 years, it draws an average return of say 10% per annum. In other words, my donation provides $2 million for services. So it has a greater impact.
This is all very sound. And as a policy, it prevents charities from falling into the trap of doing as much work as they possibly can now, at the expense of their ability to provide more services in the future. The problem from my point of view is the interpretation of how it can be invested.
I would argue that the last few decades have shown that shrewd investment in fundraising - especially direct marketing, bequests and regular giving - is still following the spirit of the endowment. If that charity had invested my $1 million in regular givers just 10 years ago, they'd have raised nearly $10 million for services - a much better return than the market cash rate.
One argument against this avenue is that fundraising is not as safe as the market. But that depends. Money invested in cash would have perhaps yielded an average of 2.5% per annum very safely. But it would take the best part of a century - if it ever happened - for my $1 millon to be worth more than if the charity had spent it straight away.
This is due to low returns and inflation. A more aggressive approach may have averaged better returns, but not over the past year, and still not as good as yields from regular giving.
Fundraising could have gained a much higher return. However for success many things would have had to be in place already, such as skilled staff, strategy, good creative, a well-managed database, infrastructure like computers, and so on.
For consistent results, the best option, as always, is a balanced portfolio with some investments in fundraising and some in cash, property, shares etc.
The past year has been pretty bad for investments, with no net growth thanks to the financial crisis. But over the past decade, the market (especially in property) has served charities well.
Then again, traditional ‘safe' investments have performed poorly compared to growth in sustainable income for charities that used reserves to invest in regular giving - and not just in the last year.
Exploring annual reports, we can see that Australia for UNHCR, Seeing Eye Dogs Australia, The Stroke Foundation, CanTeen, Surf Life Saving and Save the Children in NZ have all grown their fundraising income well over 50% in the past two years. The revenue of the first three organisations has more than doubled over those two years.
Although The Stroke Foundation has proved that good old-fashioned mass-cash direct mail can still work, most of the growth came from regular giving - and most of that from F2F.
Interestingly, the biggest factor in growth from regular giving and direct marketing is not the type of charity, brand awareness, age, product or geography - it is how much was spent. There is always a learning curve, but after that the return is based on investment levels. Spend more, get more.
The next time your acquisition budget is slashed or non-existent, push the barrier. Check what reserves your charity has, including property - and reframe your acquisition case as an investment decision. Work with the finance director / treasurer to scenario-plan, check what returns have occurred from investments and also what is planned.
That finance director in New Zealand was spot on. Provided they can line up an F2F supplier, make tests work, recruit a staff member to manage the new donor relationships and get the appropriate systems in place, they should sell their property. There is absolutely no sense in not doing so.
A few last words of caution though.
Pete Thomas, director fundraising and marketing for Amnesty International Australia, pointed out to me that "the predictability of pledge income [regular giving] does mean that the level of reserves does not have to be as great as it may be if we relied on events or mail. But even an organisation with predictable pledge income can be hit by fire, database meltdown, large scandal, government intervention, strike, legal action etc. which can interrupt income flow and thus our ability to do our life-saving work."
In essence, then, every charity should keep some cash reserves.
But stop and think hard if your reason for doing that is ‘keeping money aside for a rainy day'. Charity bosses - it is raining outside right now. Please make sure your paradigm recognises that.
Every month I write something agitating like this for Fundraising and Philanthropy magazine - for their e-briefing 'The Agitator'. Subscribe to their e-briefing here.
Thanks to Margaret Harlow from Givewell for going well past the call of duty to help with the reserves research.
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