Kids Company: the sad truth about why charities suddenly collapse

A backlash has begun against the children’s charity, Kids Company, which has been shut down amid questions about how it used government funding. Some critics have accused the charity of failing to keep reserves, while others have criticised its hand-to-mouth financial practices.

But the critics have no understanding of the stringent criteria laid on such organisations or the endlessly counter-intuitive and contradictory demands placed on them from funders and auditors.

It is patently obvious why a charity like Kids Company could suddenly collapse. Many other similar charities come very close to the same fate on any given day of the week – particularly those providing public services such as education, training or social support.

At one charity I have known over many years, the possibility of folding is on the agenda at every single trustees' meeting. This particular charity has moved from being completely dependent on grants to providing public services for contract fees for delivering government programmes such as media training. In the process, its economic situation has shifted from tight to perilous.

This is a familiar path. Under the current and previous UK governments, charities have increasingly been used to replace the state as providers of public services. They do so under contract but the situation has become untenable. The contracts can end up costing an organisation money rather than enabling it to earn. They are often paid according to specific results, which fail to take into account all the other good work they do. As a result, some have discussed dropping the services they provide.

However much charities believe in improving the lives of deprived people (or animals, or environments), they share the fate of companies that simply cannot keep going at a loss.

Staying afloat

The Charity Commission recommends that charities have reserves and although it doesn’t specifically say how much those reserves should be, a rule of thumb is often taken to be three months' salary provision. On the other hand, funders often refuse to donate to organisations with any significant reserves.

Finding another funder is not necessarily straightforward either. Although it might look as if there are many philanthropic organisations around, most of them have very tightly drawn funding criteria. Some make decisions based on geography, others by purpose and others by amount.

And applying for funding takes time – which costs money. Very few funders include organisational or managerial costs in their funding agreements (and service contracts are the worst). That leaves charities forced to find creative ways to eke administrative costs out of funding agreements.

David Cameron and Camila Batmanghelidjh.Demos, CC BY-NC

After all, how can you administer a grant with no one to administer it? Who is supposed to run an organisation that delivers services if the cost of administration is not included in the service contract? Who do funders think will be there to satisfy their bureaucratic demands for monitoring, reporting, data collection and all the many forms of accounting they include, often out of all proportion to the amount of money provided?

The kind of mindlessly insulting criticism “backroom functions” bandied about by over-salaried politicians seeking to cut bureaucracy has led to a real crisis. Faced with increasing demands for ever more detailed auditing information, yet denied any funding for the staff-hours required to satisfy such demands, is it any surprise that charities are getting into trouble? And who can be surprised that their survival is usually at the expense of the health, family-time and well-being of their pitifully paid employees?

But the government can often be the worst kind of funder. Civil and public servants, especially career public servants, often have little insight into how charities operate or how perilous life can be under short-term financial arrangements. Dribs and drabs of uncertain funding keep charities in limbo and unable to plan effectively.

Divide and conquer

Of course the charity sector as a whole is no cloud of angels. Competing ever harder for ever scarcer sources of funding (especially dwindling public funding), some lose sight of the greater good. Some even delight in the collapse of their competitors in the mistaken belief that they may profit from their demise.

Big and successful charities like Kids Company do tend to attract envy and suspicion – why are they getting big government grants when we are not? Why do they seem so successful while we are crumbling? These tensions simply add to the pressure for managers of small charities – who must excel at every task. They have to be a manager, an inspiring leader, a fundraiser, an accountant, a PR charmer, the personnel office, and more.

Smaller charities in particular end up hanging on in the hope of receiving sparse favours despite constant rebuttals and unreasonable demands, often because they have nowhere else to turn. If one funder delays its decision, the whole charity could collapse.

The question is not why Kids Company collapsed so suddenly, but how on earth it managed to continue working for so long under such unreasonable conditions.

There should not be surprise that the government gave Kids Company another £3m at the last minute, but about the fact that the government never instituted a sustainable funding stream for the services that Kids Company was providing.

The real question is why Batmanghelidjh was forced to beg for more money when her organisation was clearly helping distressed clients.

Charities cannot replace the welfare state. That they are now being expected to do so without the reliable funding required is a reflection of the political bankruptcy of our times.

Simone Abram is affiliated with Heeley Development Trust (chair of trustees). But no benefit could arise form this article to her or to the organisation. She has received funding from ESRC to study local organisations, none of which stand to benefit from this article. She is a trustee for the Royal Anthropological Institute of Great Britain.