Blogs/Vlogs

What your reserves say about your charity

29 November 2018

Reserves are not just a fund set aside for that rainy day; they are a signal to your supporters.

Trust

Those of us who are involved in charity fundraising will be fully aware of the various reasons why some potential donors decline to give. The Charity Commission report, “Trust in Charities 2018”, referred to by my colleague, Harry Howley, in his blog of 20 July, states that the factor most important to potential donors is ensuring that a reasonable proportion of donations make it to the end cause. Only 53% of those participating in the survey trusted charities to do this. Apart from fraud and misuse, there are two reasons why a larger than expected share of donations might not reach the intended beneficiaries: one is excessive administration costs, the other is the retention of too many funds in reserves.

There is no doubt that donors are more reluctant to give to charities that they perceive to be too wealthy. And it is important to bear in mind that I am not talking about casual donors, who might buy your charity Christmas cards or put some loose change in a collecting box; I am referring rather to the informed donors who will check your annual report or website before they part with their money. These are the regular supporters who sign standing orders and Gift Aid forms, the public bodies and local authorities, the grant-making institutions, and the will-writers. In other words, these are your charity’s life-blood.

Assess your risks

According to the Charity Commission, reserves are held to help a charity operate more effectively, but there is no doubt that some charities hold more reserves than they need. A common strategy is to hold enough reserves to cover six months’ operations costs, but this is often a sign that no real effort has been made by the trustees to devise a more detailed plan. What is needed is a thorough, scientific assessment of the charity’s risk profile, both with regard to its income streams and its future commitments.

If there are major donors, a view needs to be taken on the risk of any of these donors becoming unable or unwilling to continue their support, and what alternative sources might be tapped in that event. Where there is a significant degree of uncertainty over future income streams, the charity ought to maintain a higher level of reserves, but this is also a prompt to work on building more diverse sources of income.

Is your business model robust?

An examination of the charity’s future commitments is often quite straightforward. Where a future project is planned for and funds are being set aside, it is usually desirable to transfer these into a designated fund. It is equally important to ensure that when the project is complete any surplus funds are either returned to the general fund or reallocated to another project. Use can also be made of restricted funds (those whose use is defined by the donor). This can be particularly appropriate in cases where a charity has a regular annual commitment to finance and relies on a specific source of income to fund it. By arrangement with the donor the income can often be timed to match the expenditure.

If the outcome of a risk assessment indicates that high levels of reserves should be held to protect against some foreseeable crisis, the trustees should also consider what other steps could be taken to mitigate losses, for example redundancies, sale of surplus assets, downsizing premises, etc. Such steps will possibly reduce the size of the ‘war chest’ required. A continuing need for a high level of reserves, though, could indicate an unsustainable business model.

Make your strategy known

Finally, effective communication with supporters and donors is vitally important. A good trustees’ annual report will describe succinctly the strategic risks facing your charity and how these are taken into account in determining the amount of reserves held. Keeping the public well-informed and demonstrating effective management will serve you well in building and reinforcing trust in your organisation.

Can we help?

If you would like assistance in formulating a reserves policy, preparing your trustees’ report or any other matter regarding the organisation of your charity, please don’t hesitate to contact me or any member of our Charity Sector team here. Alternatively, you can read more about the services we provide to charities here.

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