Working out the right level of charity reserves

Working out the right level of charity reserves
Third Force News
20.05.16

 

I am often asked what level of reserves a charity should hold and given the publicity around high profile charity failures, this will continue to be a topical issue for the foreseeable future.

 

The pendulum of public opinion regarding charity reserves swings from criticism for holding too much in reserve and not spending enough on charitable purposes to not holding enough in reserve and risking closure. How do we as charities find the equilibrium – where we hold enough reserves to be sustainable while at the same time are meeting all of our responsibilities in terms of current and future service provision?

 

Why hold reserves at all?

 

All organisations need a certain amount of working capital to manage cash flow. Charities often have income streams that are not completely predictable; reliance on only one or two income sources or a single main grant funder can lead to a level of uncertainty over future income levels. Holding cash reserves allows the charity to meet its liabilities as they become due. In addition, engaging with a new opportunity, enabling growth or change by developing new programmes may be possible when the organisation has funds in reserve to allow it to do so.

 

So, how much is enough?

 

There is no simple answer – no one magical figure, or "one-size-fits-all" calculation that can be applied to every charity in order to determine the reserves they should hold.

 

A reserves policy is not even simply a figure – it is a document, or a series of statements, that forms part of the financial planning procedures, and indeed a charity’s overall strategy.

 

Policies need to be developed that can explain, given a particular set of circumstances, what is an appropriate level or range of reserves. Consideration needs to be given to the income and expenditure profile of your charity, the risks and uncertainties faced and determine the funds required to fill any gaps to ensure continuity of service. You have to be able to show that planning has gone into developing a policy that should ensure the charity is not only financially sustainable, but that there is a level of security and certainty around service provision.

 

Reserves cannot be analysed purely by taking a snapshot of the charity’s financial position at the year-end. They need to be monitored and reviewed throughout the year. You need to be able to understand when reserves are being eaten into, just to keep afloat, whether a reduction in reserves is due to a planned use, or indeed if reserves are growing without plans for future use.

 

Nor can we assess whether a charity will survive or fail by considering one figure in one year in isolation. We need to review how reserves are changing year on year, and combine that with our strategic plans in order to analyse our individual charity’s sustainability.

 

Finally, we must also keep our eyes firmly on why our charity exists. There is absolutely no point in being financial sustainable if we no longer have the funds to provide the appropriate services to our beneficiaries, now and in the future.

 

We must put beneficiaries at the heart of everything that we do, including planning reserves.