We have previously explained the difference between the four types of funds that charities can use and considered the treatment of donations through appeals in our charity blogs, but what about the reserves policy? In this article, we consider the tricky question of how much money your charity should hold in reserve.
The importance of a strong reserves policy
It is important to set a strong reserves policy, and for this to be reviewed regularly to ensure that too much or too little is not being set aside. Your reserves policy should be a working document that fits into your charity’s needs at that point in time. Once you have decided what is key, you should then work towards maintaining that level of liquid reserves in case of bad weather.
The policy should set out:
- how much your charity needs to hold in reserve and why
- how and when your charity’s reserves can be spent; and
- how often the reserves policy will be reviewed.
All charities preparing accruals accounts (all charitable companies plus any unincorporated charities with income over £250,000) must, by law, set out their reserves policy – or reasons for not holding reserves – in the trustees’ annual report.
How much should you hold?
The reserves policy should be equivalent to three months’ expenditure, right? Wrong! This urban myth could be the undoing of your charity if you think it is just something you have to write in your trustees’ report to satisfy your auditors. In fact, Charity Commission guidance stresses there is “no single level, or even a range of, reserves that is right for all charities”.
So how do you decide what level of reserves is right? This question is a difficult one to answer as reserves that are ‘too high’ can make it look like your charity is not focused on the front line but having reserves that are ‘too low’ can make your charity look vulnerable or indicate poor planning.
Perhaps you decide that, as a minimum, your charity must hold the sum you would need to fund redundancies if you had to close the charity, or perhaps the key figure for your charity is the sum to have in reserve should major sources of funding be delayed. Once decided, you should know what the current level of your charity’s reserves is. Not that as stated in your last set of annual accounts signed off by your auditor, but today. If you don’t know the answer, you need to get up to speed on this quickly as regularly reviewing reserve levels and policies is crucial.
It is also important to lead the public to understand that, although charities do not make profits for shareholders, they nevertheless need to make surpluses out of which to accumulate reserves to fund future activities and build resilience against risks. It is essential to be transparent about your reserves policy as if you are widely believed to have large reserves, further appeals for funds may provoke resentment against the charity apparently seeking funds you do not need, but too low and there may well be concerns about sustainability.
The Charity Commission suggests fully explaining reserves, rather than using a standard reserves policy wording.
Essentially with reserves, it is important to remember that size matters, but it is the quality of the reserves policy, set out specifically for your charity, that is as important as the quantity of reserves alone.
Want to know more?
Our latest Charity and NFP Outlook includes a detailed article where we explain the four different types of funds that charities can use, consider the treatment of donations through appeals, and look at the importance of setting a strong reserves policy, including tackling the tricky question of how much money your charity should hold in reserve. Download the publication using the link below and turn to page 13 to read more.
