Charities need to address gaps in reserves position, warns RSM

The majority of charities have gaps in how they calculate their reserves position and communicate their plans with internal and external audiences - highlighting financial vulnerability across the sector, warns RSM.

The statistics, taken from RSM’s Charity Reserves: resilience in 2018 report, highlighted that 94 per cent of charities that were researched needed to make improvements to their charity reserves policy, with over two fifths (22 per cent) needing to make significant improvements.

Nick Sladden, head of charities at RSM, said:

‘The gaps in reserves calculation and communication is a concern for the charities sector as errors could lead to inaccurate representation of financial strength. 

‘It is critical these shortfalls are tackled. In turbulent times, financial resilience will help charities to stay flexible and adaptable, so they can continue to fulfil their commitments to beneficiaries. A well thought out reserves policy is now more important than ever before.’

RSM also highlighted in its recent Funding and Functionality report that over a quarter (28 per cent) of charities have between nothing and three months operating costs in the pot – highlighting the small margins many charities are working with. In addition, half (50 per cent) of charities are using reserves to control cashflow. 

Nick adds, ‘Operating at the limit puts pressure on financial reporting as organisations needs to have accurate and timely information to ensure they do not go over the edge. It’s also worrying to see so many charities dipping into the reserves to control overheads as this is not a sustainable long-term strategy. 

‘Getting the reserve policy right is an ongoing balancing act. Too little, and charities could be exposed to shifts in donor contributions, contracts and fundraising; and too much, and questions could be asked about whether charities are applying their resources in the best interest of beneficiaries. So, it’s vital that this position is accurate and reviewed on a regular basis to ensure the charity is covered.’