Many charities and their trustees are facing growing pressures to balance rising operating costs against limited donations.
While the instinct to keep funds safe is understandable, holding too much cash can limit a charity’s ability to grow and achieve its goals.
According to the Charity Commission’s 2022 report, around 13 per cent of the £250 billion in assets held by UK charities with annual income over £500,000 sits in cash.
While it is important to safeguard a charity’s financial stability, there is a risk of missing out on opportunities to invest those funds to make more from the donations that have been given.
What are the hidden costs of playing it safe?
Keeping large cash reserves in low or no-interest accounts may feel secure, but it can put charities cash at risk of falling value over time.
High inflation and currency fluctuations can reduce purchasing power and result in cash funds losing value in real terms.
Smaller charities may feel intimidated by the potential risks of investing and beginning the process if they have limited expertise.
However, there are low-risk options, such as money market funds, which offer better returns than traditional savings accounts and can maintain access to cash if needed.
How to turn your funds into an investment?
The Charity Commission found that 57 per cent of UK charities hold no long-term investments, despite 59 per cent of their assets being uninvested.
By understanding the investment process, charities have the potential to generate returns, fund programmes and create a greater social impact.
When starting the process, they should assess your finances and see how much money is needed for short-term operations and how much can be invested.
Charities can also create an Investment Policy Statement (IPS) to outline their objectives, potential risks and how investments can support their goals.
Investing can be daunting, but by seeking legal advice on how to comply with legal responsibilities and the charity’s governing documents, they can make sure those first steps are done right.
Traditional financial investments are a good approach when wanting to deliver returns over time and this can include cash deposits, shares, property and common investments.
Social investments also allow charities to achieve their goals whilst earning a potential return and offer lending to or investing in other social enterprises or charities.
Another option is Common Investment Funds (CIFs), which are funds targeted for charities and regulated by the Financial Conduct Authority.
For charities with permanent endowments, a total return approach can allow trustees to use both investment income and a proportion of their capital to fund charitable activities, rather than being limited to income alone.
Trustees should create a clear investment plan in which they regularly monitor and keep informed on the changing market and how this can affect their investments.
Charity trustees have a fiduciary duty, set out by the Charity Commission, to advance the purposes of the charity for public benefit.
Trustees must exercise reasonable skill and judgement when making investment decisions and consider diversification, risk and expected return.
They must also comply with the charity’s governing documents, following any investment restrictions or seeking amendments where necessary.
Most importantly, trustees must act in the best interests of the charity and its beneficiaries, prioritising long-term sustainability and avoiding conflicts of interest.
How to turn my funds into social impact?
Trustees and charity investment managers do not have to take risks to earn the rewards of investing, as setting clear objectives and regularly reviewing finances can allow them to do so safely.
Investing can be gradual and starting simple with short-term investments can still provide growth for a charity.
By making sure their investments continue to align with their values, charities can protect their finances and continue the growth and hard work they offer.