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Charities under strain as cash reserves drop

CHARITIES are facing increasing financial pressure with their cash reserves dwindling and rises in income lagging behind inflation, according to a leading accountancy firm.

Organisations are still feeling the effect of the economic downturn, with a drop in donations as people feel the pinch on domestic budgets and the loss of contracts to deliver services.

Accountant BDO LLP, which advises the not-for-profit sector in Scotland, said growth remained weak, deficits were increasing and looming changes around pensions were likely put added pressure on charities.

Turnover rose by just 0.8 per cent last year among all charities north of the Border, while inflation was 2.6 per cent. Larger charities with a turnover of £1 million or more fared worse, reporting a rise of just half a per cent.

Martin Gill, partner and head of charities at BDO in Scotland, said: "Any fall in income will impact upon the levels of service they provide - often in key areas such as health, social care and housing and financial stability is essential for charities involved in such crucial work. The Scottish charity sector employs 138,000 people with an annual income of £4.9bn, so is a major financial force. However, turnover per employee is £35,543, which does not compare favourably with the private sector."

Small private firms have a turnover per employee of almost £75,000, while for those employing between 50 and 249 people the figure is £138,000.

A lack of cash reserves was another area of concern highlighted by the accountants. BDO found that the 488 charities with income between £1m and £5m have just four-and-a-half months of reserves; while more than 200 charities with an income of more than £5m had little more than five months' worth on average.

Mr Gill added: "Relatively short cash reserves may not be a ­problem for all charities. However, some may soon ­experience financial difficulty if revenues reduce further."

A wide disparity between the largest and the smallest charities was also noted. Those with a turnover of £1m or more represent less than four per cent of the total number of Scottish charities, yet generate 80 percent of income and employ almost three-quarters of the sector's workforce.

Deficit recovery plans on pension schemes, which will impact on balance sheets from the end of next year, would lead to "large holes" in larger charities' accounts, creating further issues, he said.

Pat Armstrong, chief executive of the Association of Chief Officers of Scottish Voluntary Organisations, said financial concerns were "nothing new" for charities, with many seeing an increased demand for services at a time that budgets were being squeezed.

However, she insisted charities had become increasingly innovative and adaptive to change.

She added: "The sector is very well versed in making the most of every penny and is already hugely efficient."

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