Understanding and accurately reporting your charity reserves is an important way of helping your charity remain resilient.
In what has been a very difficult year for the charity sector, this is more important than ever.
As a result of the Covid-19 pandemic, some charities have faced an increased demand for services, while others have been affected by venues closing and the whole essence of the charity being undermined. In addition, fundraising events have been cancelled, shops have closed, visitor donations have disappeared and returns on investment portfolios and bank accounts have been slashed.
This has created pressure on cashflow and, in many cases, has started to eat into charity reserves.
It is for situations such as those caused by the coronavirus pandemic that the logic of having free reserves within your charity becomes clear.
The purpose of charity reserves
In recent years there have been a number of high profile charity cases in which the absence of reserves has caused a charity to either have to reduce the levels of its operations or, worse still, close altogether. When times are good it may be possible (though not advisable) to live from day to day. In tougher times, having put something aside for just such circumstances is demonstrated to be a wise course of action.
But reserves are not just there for a crisis. If a spending requirement presents itself, then if you have reserves you have the ability to respond and to embrace a development opportunity.
Reserves are also important for securing funding. Potential funders will assess whether or not your charity is in a healthy position and therefore warrants money for a particular project. The regulators will also look to ensure that you are using money sensibly.
The importance of a reserves policy
All charities should have a reserves policy, even if the policy simply states that you do not need reserves. Your reserves policy should cover the level of reserves you need and why, how and when they can be spent and how often the policy will be reviewed.
To produce a policy, understanding your reserves is clearly important. A recent survey, carried out by accountants BDO, stated of the biggest charities in the UK showed that most were struggling to accurately report their level of free reserves and in fact had less than they thought they did. It revealed that the average larger charity has only about two months’ operating expenditure in free reserves, which is a third lower than it was just two years ago.
Calculating your reserves
A charity will frequently base its reserves policy on the value of its unrestricted funds, but that is not correct.
Free reserves are the value of your unrestricted funds less any of those funds that are not readily available for spending.
Starting from your unrestricted funds you would subtract such things as:
The result will be your free reserves, those that you can turn to if income drops off, if emergency spending is required or a new opportunity arises without harming the ongoing operation of your charity. This figure should be highlighted in your annual trustees report.
As an example a charity has the following balance sheet:
Here, applying the equation free reserves are equal to the cash £100,000, but if the trustees have agreed to spend £50,000 on a new project, perhaps as matched funding with a grant provider, then the actual free reserves are just £50,000, not the £250,000 that would be reported if unrestricted funds was used as the reserves figure.
Being open about your charity reserves
There has been a tendency in the past for some charities to depress the level of reserves being held. The thinking was that if a charity is seen to have too much money, it will not be able to attract funding.
This is increasingly seen as an old fashioned approach. Any funding organisation needs to see that its money will be spent for the purposes it is being given, rather than being used to prop up an ailing organisation or worse still one that is likely to be lost to insolvency.
For any trustee, the message is quite clear, accurately quantify your reserves, know why you are holding them and be ready to review the required level and purpose of your reserves to make sure that your charity is ready to face whatever society may throw at it.
For more information on charity reserves, read the Charity Commission guidance booklet CC19, Charity Reserves: building resilience.
By Ian Huggett, Partner