Kids Company’s Trustees Failed – Lack of Reserves Was Key

We’ve taken a look at the Kids Company last annual report and accounts, which is for calendar year 2013, and contains a lot more “marketing” pretty pictures and inspiring philosophical musings that it does hard numbers. What about the results? No, they can’t be measured. That highlights one of the problems with government giving grants to charities in a manner that is not aligned with how suppliers are managed! From the report:

Measuring the true impact of Kids Company’s intervention is not possible. Society has not developed evidencing tools which capture the potency of hope, the rekindling of imagination and returning children to dignity. So we are left with some inadequate measures which at best describe our output and capture aspects of our outcomes. We want to develop a more sophisticated narrative of efficacy in relation to work with vulnerable children and young people, which is why we have partnered with a range of academics and scientists.”

There are however enough numbers in there to make it very clear what has gone wrong. Indeed, it is a pretty simple picture:

  1. The charity received income of around £24 million in 2013. It also spent almost the same, meaning the net income for the year was less than £100K.
  2. Of the expenditure, a very high proportion was fixed costs – primarily staff, which from the accounts we can see accounted for £15.4 million. Add in property and some other bits and pieces, then probably some 70% of the cost base was fixed.
  3. Reserves were only some £430,000 – and it is not clear how much of that was intangible. Cash in hand was basically nil. Even if the £400K was available, that was only just over one week's worth of staff cost.
  4. Central government gave the charity £4.7 million in 2013 – some 20% of the total. So whilst this was significant, a well-run organisation should have been able to withstand this dropping over time, or even rather suddenly.
  5. But because of the reserves situation and high fixed costs, any decline in revenue could quickly lead to a loss. It’s not clear what the “direct” costs might be – some of that could be the handouts it is alleged the charity gave to kids – but as they were dwarfed by fixed costs, a loss in revenue would very quickly mean that the organisation would be in trouble unless staff costs also dropped rapidly.
  6. Presumably that was why the government gave the last tranche of £3 million recently to fund a redundancy programme (“re-structuring”), which would have enabled the charity to get onto a better footing and build reserves. But it does not appear that any staff cuts were under way. Instead the money was used for salaries, presumably on the assumption that more money would be forthcoming.

The key point for me is the reserves (or lack of) and the vulnerability of the high fixed cost base. That is the question that we should keep asking – why didn’t someone insist on the reserves being built up?

When I was a Trustee of CIPS, (the Chartered Institute of Purchasing and Supply), a charity, we had big debates about the appropriate level of reserves. How long should the Institute be able to survive (pay the bills) if all revenue suddenly stopped, even though that was impossible really given the membership payments? We would argue – but over whether it should be say, three months' or six months' reserves. Not a week, for goodness sake. I’ve been in the past a non-executive director for two large public sector organisations and now one private sector, and this sort of risk analysis is pretty basic stuff for a Board.

But the risk section of the Kids Company report says this: “Our business model is to spend money according to need, which is consistently growing. We aspire to build up our reserves when circumstances allow.”

I’m sorry, but no organisation can spend money “according to need.” It must be also “according to the money available.” But the principle here seems to have been just keep spending, don’t worry about building reserves, and someone – a donor or the government (because that nice Mr. Cameron thinks we’re great), will provide.

I can understand how some of the more arty non-execs might have been blinded by the good works, but Richard Handover? A man who has run a FTSE 100 business? And Jane Tyler, previously a MacFarlanes (law firm) Partner? It is quite extraordinary. I don’t understand why the auditors didn’t point out the reserves risk either. But the trustees clearly failed in their duty, and it is no use chairman Alan Yentob getting aggressive in interviews (see below).

Forget the conflict of interest issue, and whether he tried to influence BBC reports - the man should not be allowed anywhere near a penny of taxpayers’ money at the BBC if that is how he oversaw the finances of the charity.

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