Charity reserves are of vital importance and require dedicated attention to manage and utilise, just like other property, assets, and people. Consequently, a reserves policy should have an ongoing, active role in deciding how a charity is run.
Why are reserves needed?
Reserves allow charities to both manage uncertainty and plan proactively for the future. To understand the purpose of reserves, it’s helpful to consider them as for these three purposes…
- Operational: To fund day-to-day activities, such as paying rent, covering payroll, and engaging in fundraising
- Defensive: To react to unforeseen costs, such as not winning a bid or falling short of your budgetary requirements
- Offensive: To expand and commit to an opportunity, project or bid that will positively impact the organisation and its beneficiaries
Free reserves
Free reserves are available to spend on any of the charity’s purposes. The Charity Commission guidance on Charity Reserves (CC19) says that a charity’s free reserves should exclude:
- Tangible fixed assets
- Programme-related investments
- Restricted funds
- Designated funds
- Endowment funds, both permanent or expendable
- Any other commitments not provided for as a liability in the accounts
As free reserves are usually liquid, they can be readily used to manage cashflow. Charities should use free reserves strategically to balance long-term sustainability with immediate impact, preventing risks such as insolvency.
How much?
Below, we have outlined some of the most common myths about charity reserves…
“The Charity Commission recommend that charities have 3-6 months of expenditure in reserve.”
The Charity Commission do not recommend a particular level of reserves. Every charity is different and has a unique risk and opportunity profile. Whilst the Charity Commission don’t prescribe a standard level of reserves, they do expect trustees to proactively plan and report on the level reserves that is needed for their charity.
“Trustees have a duty to maximise the charity’s reserves”
Holding too much in reserve can have a negative impact on both the reputation and public support for a charity. Spending a proportion of reserves might be the best way to fulfil a charity’s purposes. It might be a completely valid policy for a charity to hold zero reserves. For example, where a grant making charity decides to award only what it receives as income, has no staff, no ongoing commitments, and faces minimal costs of unplanned closure. It all depends on the charity’s unique circumstances.
“When fundraising, potential funders will want to see [low/high] levels of reserves.”
A funder seeing a high-level of reserves may conclude that your charity doesn’t need its support. Alternately, other funders might look at low reserves and have concerns that the charity is stable and sustainable. This is where a policy is vital for clarity on what’s needed.
Why have a policy?
It’s an effective tool in two ways…
Management: A reserves policy helps trustees and staff in their decision-making and to spot any issues as they arise. It will be integral in setting budgets.
Communication: Having a policy demonstrates to trustees, staff, donors, regulators, and the general public that you know what you’re doing with your financial resources.
Proper reporting justifies usage and will help mitigate reputational risks.
Most reserves totals are acceptable to stakeholders, so long as there is a policy to accompany them. It’s as much about having a policy that demonstrates active governance as what the policy says.
Your reserves target
First, understand that no formula that works for every charity. The requirements of each organisation are different.
- Consider your income, expenditure and funds held
- List the principal reasons why you need reserves (refer to your risk register)
- For each reason identified, decide the amount needed to address it
- Aggregate these amounts; express the target as a range rather than a single figure
Note: if your target is a single number, then you’re never likely to meet it. A range is a better for practical and motivational reasons.
Ensure that your reserves policy is not static. Keep it under regular review and assess it formally at least once a year. Review your actual level of reserves against your policy each time you look at the charity’s financial performance and position. Doing so will help you identify issues as they arise and help you respond better.
New reporting requirements
As stipulated in the new SORP, reserves disclosures are now required for all charities, regardless of which income tier they sit in.
The charity must explain:
- Any policy it has for holding reserves
- State the amount of those reserves, and why they are held
- If the trustees have decided that holding reserves is unnecessary, the report must disclose this fact and provide the reasons for this decision
The figure for reserves in the report must be consistent with the accounts and, where this is not evident, the charity must provide a reconciliation, either in the funds note or as a separate note.
The report must compare the amount of reserves with the charity’s reserves policy. If the amount and policy do not align, the charity should explain what steps they are taking to align the two.
The review of the charity’s reserves must:
- Identify and explain any material amounts that have been designated, or otherwise committed as at the end of the reporting period
- Indicate the likely timing of the expenditure of any material amounts designated or otherwise committed at the end of the reporting period
Need some guidance?
Burton Sweet has a longstanding commitment to charities and civil society organisations, offering practical, professional and passionate support. We want to assist you, so you can deliver effectively for the communities you serve and show the good you do.
If you need assistance with reviewing your reserves policies, effective reporting and developing a risk management process, please contact us and a member of our team will be happy to support you.
