Search
  • elliot4995

The myths about Charity reserves

There is a lot of misinformation about charity reserves and that is particularly true as Covid-19 has decimated some charities’ reserves whilst others have hung on for grim death to their pre-Covid policies. Likewise, charities do not help themselves when coming up with suitable policies and allocation of funds so that potential funders do not get the correct picture of a charity’s reserves when making decisions about funding.


It is important that we understand the rules, so I commend CC19 (Charity Reserves: Building Resilience ) to any charity trustee or CEO to ensure they understand some do’s and don’ts. I recently re-read it myself to check whether there was any recommendation as to the level of reserves that should be held. As I thought, no recommendation is made. What the publication does do however, is to remind charities of the processes that charity trustees have to go through (probably in consultation with the CEO) to decide on the correct level for their charity


I always recommend that charity reserves are something that should be revisited on a regular basis and this is particularly relevant at this time. A blog like this cannot reproduce the arguments in full but I thought I might highlight some misconceptions around reserves:-

  • a level between 6 months and 2 years is not always the right answer.

  • operating on zero reserves in order to maximise your spending is possible but not advisable unless you have certainty of income. Without such certainty, for the charity to continue you must have sufficient reserves.

  • 3 years’ worth of reserves are not automatically wrong; you must however explain why.

  • 2 charities working in exactly the same sector with identical levels of income does not mean exactly the same levels of reserves. It depends on each of their future plans.

  • You are allowed to allocate overheads to restricted funds as long as you can identify them on a logical and fair basis. This will include additional overheads incurred as a result of the restricted project.

  • You may think that designating as much of your unrestricted funds as possible will convince potential funders of your needs because of the "lack" of unrestricted funds. Not without evidence of how you are using those funds you won't!

  • Building up your unrestricted funds will not impact on potential future funding? Not without a proper explanation of a plan for those funds it won't!

  • We need a year's reserves to close down in an orderly fashion? How many charities do you know whose income has stopped stone dead and have carried on trading for a year? Be more realistic but do not forget to factor in potential redundancy costs, particularly in the present crisis.

Let us be clear about this. Your reserves policy has to be right for your individual charity and your plans. You will not encourage future funding by having large reserves with no clear and rational explanation for the holding of those reserves. Likewise, living hand to mouth with no reserves at all can also put funders off as they are more impressed with a charity that can at least be shown to be viable. Also, no two funders will necessarily have the same attitude to reserves so you need to have a policy that is realistic for you and not just because another comparable charity only holds say 3 months reserves.


I see too many boilerplate reserves policies in trustees reports and not enough that clearly show the trustees have tailored their policy to their plans. This is going to be particularly important as the Covid crisis continues.

So, keep those policies under review, tailor them to your longer- term needs and do not fall for the myths!




35 views
 

©2019 by ITR Advisors. Proudly created with Wix.com. ITR Advisors Ltd is registered at Companies House, No 12056056