Scottish voluntary organisations' financial reserves
The academic literature highlights the role that good financial management plays in helping organisations deliver their objectives, while ensuring their stability and survival. This is often hampered by a lack of financial management skills, risk aversion and inadequate funding models. Specifically, restrictive funding and short-term contracts significantly limit the ability of charities to build reserves.
This lack of financial management skill is perhaps reflected in the Scottish third sector tracker findings where over a quarter of organisations report not having a target level of financial reserves. As is the point on inadequate funding, where many respondents report having used their reserves to cover a decrease in funding, to cover rising operating costs, or to pay for salary increases.
The Covid-19 pandemic exacerbated the issues discussed above. Many charities entered the pandemic with low levels of reserves and a reliance on a limited number of income sources, often one dominant source. Having said that, calls for charities to diversify their income streams are often impractical and the sector faces challenges in rebuilding reserves and diversifying income in a difficult economic environment.
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