Trustees and other not-for-profit leaders have many issues to consider, especially in the current economic environment. As such it is understandable that reviewing the strategic positioning of reserves may not always be a high priority. However, doing this can strengthen not only your financial position, but your credibility with funders, donors and beneficiaries.
Start with the essentials: strengthen your short-term reserves
You need to keep the lights on and deliver on your mission. As well as your day-to-day banking needs, you will want to have some short-term reserves to help you deal with cashflow or unexpected expenditure. Each organisation will be different, but as an example this could be three or six months of operating expenditure or grant commitments. Easy access is a must, so most organisations will look to instant access or short-term notice cash deposits.
If you hold reserves that you do not need immediately, leaving them in an easy access account may lead to lower returns than you could achieve by giving notice on withdrawals or fixing the funds for a set period.
Actively reviewing your accounts could make a significant difference. The recent increase in the potential compensation available under the Financial Services Compensation Scheme, now up to £120,000 per deposit-taking organisation, means you may choose to hold more funds in higher-rate accounts .
There is no getting away from the administrative effort of opening an account with a new provider. However, the market has reacted to this with a range of cash management platforms that offer you access to a wide range of deposit accounts from different providers through a single application. Minimums do apply though, so these are not available to everyone.
Finally, if you can lock funds away for longer or can take a long-term view about, say, income generation from your reserves, you could consider investing in risk assets. These typically offer higher potential returns but also come with greater risk, such as limited access or the possibility of a fall in value. The thought of losing capital even over a short period can feel challenging to many trustees but it is worth considering the long-term impact of rising prices. If the interest rate you achieve on your cash is lower than inflation, the spending power will reduce over the longer term, which is a risk in itself.
Other factors that shape your charity reserves strategy
Any provider you work with will come with its own culture and public perception. A provider with good knowledge of the charity and not-for-profit sector is a bonus as they are more likely to be aware of your needs.
Think about the organisation’s culture and areas of operation reflect your own values and the possible perceptions of your donors and beneficiaries.
Important factors for many individuals today are how firms impact societies in general either directly or through their supply chains. This will include donors and funders, so knowing which firms you use and being able to explain how they contribute to, or compliment, your mission and society in general could provide benefits in other ways.
For example, let us imagine that a homeless support charity banks with a firm that provides substantial loans to the gambling and alcohol industries. Even if the rates and service are good, how might a potential donor feel about that choice?
You may need to make some compromises with banking and cash management suppliers when comparing a preferred partner with available rates and access terms, but this could be easier with investments.
If you have sufficient assets to appoint an investment manager, then they can tailor a portfolio to your financial and moral requirements. There is also a wide range of investment funds that have socially responsible or Ethical, Social and Governance criteria attached, starting from as little as £1,000. If you do add these types of criteria to your reserves, then make sure you record it in your Reserves Policy or investment statements. This tells your stakeholders how you intend to operate, and the standards expected of suppliers.