Managing and running a charity means you are always watching over finances and funding. You will know how much money you have, how much funding is coming your way, how much projects cost, future projects, and more.
Finances for charities are everything.
A big part of charity financial management is building, using, and understanding charity reserves.
Too little reserves, and you risk the charity failing; however, too much, and questions may be asked.
So, how much should your charity hold in reserves, and what does this mean for Trustees?
Reserves are essential. Critical for charities, especially in light of recent economic uncertainty and reductions in funding across the board, to help build resilience and protect a charity’s sustainability.
Charity reserves act as a financial buffer. It is a set amount of money set aside that will allow your charity to continue operating and providing vital services even when the unexpected happens.
These funds are specifically for unforeseen emergencies, to cover unexpected operational costs, delays in funding, increased beneficiary need, and rising costs.
Free reserves form part of your unrestricted funds i.e. money that is available for any purpose that the trustees see fit and that is within your charity’s objects (purpose). This differs from restricted funds, where money within this category can only be spent on a specific purpose, or designated reserves, funds that have been designated by trustees for specific purposes.
When building your reserves, we know that all charity funding streams vary, and we understand that all charity activities are different, so your charity reserves policy and amount trustees should look to hold in reserves will also vary.
For all, there is no set standard or recommended reserve level outlined by the Commission; there is some guidance in the form of CC19, which provides information and recommendations for trustees, as well as responsibilities and duties when compiling a reserves policy.
Within this guidance, recommendations surrounding reserves state that the target should be set by your charity trustees and reflect the individual circumstances of the charity.
This information should form the basis of your reserves policy, outlining the amount your charity must hold in reserves and why. It should also outline when these reserves can (and should) be spent, as well as how often trustees will review the reserves policy to ensure it is still relevant and meets the needs and position of the charity.
Your reserves policy is what will help guide decision-making, understanding, and support trustees in maintaining adequate free reserves.
We advise our clients to take a risk-based approach to reserves, so that the minimum level is what the charity would need to close, should the worst happen. This can include redundancy costs, any costs required to buy-out leases, and other costs that may be incurred, for example, legal fees. We also suggest a contingency of 5% to 10%. From there, you can build your reserves up to include operating costs.
As an industry rule of thumb, it is recommended that charities have a minimum of 3 to 9 months’ worth of operating costs to form their free reserves. Although this depends entirely on YOUR charity’s circumstances.
However, it’s important to note:
If your reserves are too low, it can put the charity’s future at risk as you risk not being able to continue with operations, provide services to beneficiaries, and keep the charity functioning.
However, there is also the risk of holding too much in reserves, and instead of being cautious and safeguarding for the future, funders may become unwilling to offer further support or additional funding as you’re not using the money you hold. This can damage your reputation and place you in a negative light.
Managing and setting your reserves and your reserves policy, therefore, becomes a fine balancing act for trustees (check out our post on roles and responsibilities of trustees to find out more).
Trustees are responsible for setting reserves, which means it’s important to know, consider, and understand:
Building financial resilience is not about hoarding large sums of money, it is a fine balancing act, where trustees must continue to show they are spending on critical services, while also building their reserves so if the worst did happen, i.e. funding stopped without warning, there was an unexpected cost arise – the charity would be able to cover this AND still continue business as usual.
Building resilience in this capacity provides peace of mind, not only to trustees but to donors, charity managers/teams, and funders. It demonstrates a level of accountability and shows that the charity’s finances are being managed appropriately.
That’s why it is essential that your unrestricted funds are reported in your year-end accounts (the charities’ SORP also requires a statement of your charity’s reserves policy to be included), stating clearly the amount of reserves you are holding with a brief explanation as to why.
How much should your charity hold in reserves?
This question is broad in scope and open to individuality, as there is no one best way to calculate this, as the amount each charity will need will vary.
Trustees must take into account the current financial position of the charity, examine and explore future predictions on funding, sources of income, market conditions etc, as well as understand what is left in their actual free reserves when you take away your non-restricted income, designated funds, money tied up in fixed assets, and liabilities or commitments that have been made, etc.
We recommend reviewing and amending your reserves policy annually, in line with your accounts, ensuring that it still meets key criteria and the scope and size of the charity.
Determining the amount your charity should hold in reserves is a significant task, but one that can prove critical to the survival of your charity.
For further information and advice please refer to the Charity Commission's Guidance which you can find here.
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