Following a recent conversation with a local charity who had been told by a funder something I was not sure about, I decided to revisit my thoughts on the levels of Charity Reserves. To do so, I re-read CC19 (Charity Reserves: Building Resiliance) to see if I could gain some insights. The first thing I wanted to remind myself of was 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 did do however, was to remind me of the processes that charity trustees have to go through to decide on the correct level for them and that no two charities are the same.
I would commend the publication to all charity trustees as I believe reserves are something that should be revisited on a regular basis. 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 do however need to 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 future plans.
- Restricted funds does not mean you cannot allocate overheads to those funds.
- Designating as much of your unrestricted funds as possible will convince potential funders of your need 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.
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 and 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.
So keep those policies under review, tailor them to your longer term needs and don't fall for the myths!