Updated: Aug 19, 2019
This is the question that I pose in the July edition of Charity Finance magazine.
Charity Commission guidance CC19 states that developing a reserves policy is likely to assist in strategic planning - I contend that this is putting the cart before the horse! Rather, charities should regard their reserves policy as dynamic, stemming from their strategy and financial planning; not merely an exercise in SORP compliance.
Many charities seem to treat their reserves as an emergency fund for a rainy day; often featuring an apparently arbitrary fixed amount below which it is forbidden to stray.
There is no doubt that the risk of sudden loss of income is a real threat to the work of many charities, but rarely will all income disappear at once – policies need to reflect actual risks. Reserves play a vital part in enabling trustees to balance spending to serve beneficiaries today versus retaining funds for future needs. A critical question for trustees, then, is how far along this ‘spend v save’ continuum it is appropriate to position their charity?
Research has shown an inherently conservative approach by many trustees – good intentions about stewardship and a focus on prudence and long-term survival can bring a paralysis of fear over releasing funds to provide new services for beneficiaries.
The net result of such an approach is that large amounts of funds may be held on charity balance sheets, while worthwhile projects remain unfunded. Some charities may benefit from adopting a more commercially-minded approach to their balance sheet; ‘sweating the assets’ to achieve the maximum return. Even trustees that decide to alter their approach can find themselves defeated by inertia and apparent surges in risk levels. The British Red Cross announced in 2011 that it would release accumulated reserves, reducing levels from £35m to £15m. By 2017 its reserves sat at £57m against a re-revised policy of £40m-£50m!
If a charity is to maximise the benefit that it delivers from the resources available, it should have a clear strategy and a financial plan to support it, with a key component being a coherent reserves policy.
Andrew Hind summed it up with this challenge: “By and large, trustees who believe that their charity needs excessive reserves have often lost their incisiveness and the appetite for innovation and challenge. In short, trustees and charity managers in such organisations have settled for the quiet life.”