UNLIKE COMMERCIAL ENTITIES charities need to grapple with the question of reserves. In a commercial setting funds would not be stored for a rainy day or to guard against future failure; rather surplus money is invested into the business or distributed to shareholders. Although our driving values are not to create profit or distribute surplus for individual benefit, I would argue that we need to take another look at how we determine what we should keep aside.
Guidance on reserves often focuses on the role of finance teams and the notion of a pot of money to protect for a rainy day. The strategic importance of reserves and their relevance to the charity’s overall financial strategy and proper resource management can be overlooked.
It has long been a myth that the Charity Commission dictates the levels of reserves that charities must keep. However, there is no set amount a charity should keep and in fact, there is no legal duty to keep reserves at all. It is the legal duty of trustees to determine what action to take in the best interests of their charity and indeed charity law requires that income is spent within a reasonable period of time. In Beyond Reserves, we argue that charities should assume that they should use the funds they receive, and be able to provide solid, considered justification for keeping any of these back as reserves instead of spending them. In other words there is a presumption that you only keep what you require to meet the needs of beneficiaries.
Proper reserves setting and management is not a cyclical action undertaken periodically, but rather an on-going part of an organisation’s management of its resources and business model. Some trustee boards can have the tendency to only consider reserves when going over the year-end accounts – and even then discussion goes no further than making sure the charity has the ‘x’ months’ worth of operating costs their policy dictates. Charities should be looking beyond this and good management can only coming from truly understanding your business model, the risk profile of the organisation, the security or volatility of income streams and the organisation’s need to adapt to changes in circumstance.
Charities have been dipping into reserves there is a lack of clarity over how reserves can be really made to work for an organisation and not solely kept as a pool of funds to draw upon in crisis. Research carried out by CFG threw up some challenges to the sector – do we hold too much in reserve through adopting a traditional “let’s hold x months of operating costs” policy? And is this really the most efficient way of doing things?
The case studies we share in the research show us that perhaps we do. Indeed the British Red Cross determined it could adjust its reserves policy downwards from £35m to £15m, freeing significant funds into the charity. Clearly not all charities will reassess their reserves levels with such drastic results, and they might find that the sums retained in reserve are about right or desperately need to be increased, but these case studies demonstrate why charities owe it to their beneficiaries to refresh their view of reserves.