Much is being discussed and written about regarding the global recession. We will only be able to see the full effect of this on funding when we look back in a year or two and can calculate the actual impact. Anecdotally though, there are many stories of reduced funding from foreign donors hardest hit by the crisis, and corporate donors whose profits are down and whose giving is often based on a percentage of net profits after tax.
Although no one expected a global crisis to the extent experienced, many organisations have been building up reserve funding in any event to see them through cash flow problems caused by, for example, a delay in donor funding, and to take away some of the pressure to fundraise.
There are a number of different views on reserves and we see a range of attitudes from donors in response to an organisation having a reserve. But has this crisis not perhaps highlighted that - as one organisation put it - a reserve is now a ‘have to have’ rather than a ‘nice to have’?
Some donors do perceive the existence of a reserve as a sign that an organisation does not need further funding. On the contrary, reserves should be seen in a positive light; as a sign that the organisation is in good financial health and so will be in a good position to deliver the results and impact required by the donor. This in my opinion is an area where a concerted effort should be made to help donors become aware of the importance and value of reserves - ultimately to the extent where donors are willing to provide undesignated funding for this purpose.
Building a reserve
Some may argue that it is not always easy to build a reserve. This can be true particularly where only designated funding has been received. However, it is not impossible and there are ways of doing this.
The South African Revenue Services (SARS) itself has recognised the need for non profit organisations (NPOs) to generate income through means other than fundraising and has made provision for this in the legislation pertaining to the tax exemption of NPOs.
Possibilities therefore include generating income through trading activities. For example, if you develop books on HIV/AIDS awareness the organisation could also sell these to corporates at a profit. There will possibly be some tax payable on this income but what remains is income that the organisation would not have had without doing this.
Bequests very rarely come with conditions attached and these are a great way to start or supplement reserves.
If an organisation has a long-standing relationship with a donor it would be worth approaching them to ask for funding specifically to build a reserve, towards the organisation’s longer-term sustainability. If need be, they can impose certain conditions - for example, on the way that it is to be invested and reporting on the investment of the funds. One could even ask a donor to rather loan the funds for a reserve, so that the organisation could invest these and make use of the interest. Another possibility would be to ask the donor to match the funds raised towards a reserve.
Investing a reserve
The way in which reserve funding is invested will be a major contributing factor to the success of this as a sustainability strategy.
There is the common misconception that cash is the safest investment. While sometimes it can be, if funds are to be invested in cash for longer periods of time one ignores the effect of inflation at one’s peril. For example, inflation is currently at about 8 percent and if an organisation’s cash is earning about 8 percent in interest, there is no real return on the investment. We all know how much more R100 could buy us 10 years ago as compared to what it can buy now.
If the reserve is to be invested in the longer-term for at least three to five years, there should be some exposure to investments with the potential for capital growth but importantly, any investment of the funds needs to be in line with the fiduciary duties of the board and proper advice must be taken. Organisations cannot take the same level of risk in investing as individuals can, but at the same time keeping funds in cash for the long-term is not the solution either.
Some organisations with reserves are tapping into the capital of these during current trying times and others are making use of the interest earned on the invested reserve funds. Others still are managing to leave their reserves intact due to a continued flow of funding. Each organisation’s circumstances will be different. Without a doubt though, the existence of a reserve helps ease the pressure during times like these.
Anna Vayanos heads the Philanthropy Office at BoE Private Clients through which specialised investment and fiduciary services are provided to donors and NPOs. She can be reached at AnnaV@Boe.co.za