In 2014 a high profile charity folded and admitted that it had experienced problems by not following its own reserves policy. 2015 proved to be another tough year for the sector with more high profile failures. The general public also became increasingly concerned about fundraising practices and charities were generally criticised for having weak financial reserves.
However, the thorny issue of reserves is not a new one for charities. Striking a balance between having spare cash for a rainy day, while satisfying donors that much needed charitable funds are not just sitting idle, has long been a test for trustees.
No more hoarding
Some larger charities have previously been perceived as hoarding money. Yet recently, one very high profile organisation collapsed in part because it failed to store sufficient unrestricted funding in case of problems. Yes, many charities do survive on a shoestring, and very much exist hand to mouth, especially if running contracts on behalf of statutory bodies, but it is unrealistic and dangerous to manage an organisation effectively with no financial back-up plan.
Cash flow management
One particularly telling and potentially worrying finding from our recent research, 'the current and future state of charities', is that nearly half of charities are drawing down on reserves to manage costs and cash flow. As a result, perhaps unsurprisingly, they anticipated that their reserves will be lower over the next twelve months. Using reserves in this way is not in itself necessarily a problem, but having a clear awareness of levels and the long-term viability of such an approach needs to be considered. Drawing on reserves should be seen as a short-term fix rather than an overarching financial strategy.
Part of the problem is that there is no one size fits all approach. What is the right amount of reserves a charity should hold? Three months’ expenditure may be appropriate for one organisation; a year’s running costs may be the level at which another feels comfortable.
This is where having a robust and well thought out reserves policy, a statutory requirement in the trustees’ annual report, can be of great value. As long as a charity can justify the level of reserves it holds, it is in a much stronger position should there be any criticism.
The trustees need to sit down and assess the amount of reserves they are happy with, and that it is also realistic. Look at income streams, and develop clearly considered and well monitored budgets and forecasts that consider a horizon of at least 12 months. Produce timely, coherent and concise management information so trustees can see the bigger picture.
However, having a strong reserves policy in itself is not necessarily of any benefit and also should not be regarded as a static policy. Just printing words in the annual report to satisfy a compliance need is of little use if that policy is not adhered to. The policy should be embedded in the day to day financial management of your organisation. It should be constantly assessed, and if necessary, amended to fit changing circumstances of your charity and the wider economic environment.
Ultimately, ensuring that the charity’s reserves position is clarified is vital for both short and long term health and sustainability and then should be considered alongside the overall strategic plan. Apart from anything else, getting it wrong could affect not only the financial reserves but the reserves of goodwill towards the charity from supporters and the wider public.
If you would like any more information lease contact Karen Spears or your usual RSM contact.