The headline screams out “£26 billion held by charities as reserves”. Shock, horror! Reserves are a very contentious subject; this article has been written to encourage you to think carefully about reserves. Consider this:- a Grants Officer from a local funder visits a prospective grantee and finds that they hold £15,000 in reserves; she immediately says the grant-making body will not provide a grant because the organisation has too much in reserve. Later the same day a potential business sponsor visits and on seeing the organisation’s reserves says he is concerned about the ongoing viability/solvency of the organisation because they are holding so little in reserve. Clearly this is a thorny subject! In order to resolve this, every voluntary organisation should consider having a reserves policy; and the end of the financial year is an excellent time to be thinking about this.

 

Reserves- What are they?

---

 

The Charity Commission’s definition  is that reserves are unrestricted income which is not yet spent, committed or designated; lets unpack that! It means that reserves exclude restricted funds (which are income funds that have been given for a specific purpose), designated funds that the trustees have set aside for a specific purpose, and any fixed assets that are being held for the charity’s own use.

 

Reserves policy

 

In order to meet the concerns of both the Grants Officer and the business sponsor mentioned above, you need a well-worked out reserves policy. Having a reserves policy is a real sign to funders and donors that you are following good practice and that you take good financial management seriously. It also increases the transparency of the organisation thereby increasing the confidence of donors and members.

 

 

What to put into a reserves policy.

 

Your reserves policy should include 4 things:-

1. A justification for holding the reserves in the first place.

2. The level of reserves that it has been agreed should be held

3. The steps that you are taking to get to or maintain that level

4. The arrangements for reviewing the policy

 

Lets take each of these one by one:-

 

1. Justification

The justification for holding reserves will vary from organisation to organisation, and at different times in an organisation’s development. It is a good idea before you decide on your reserves policy to do a risk assessment of the organisation. This means taking a long hard look at the significant things that could go wrong and could put the organisation at risk. A useful tool for doing this, which you may have already come across, is to do a SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities and Threats: this analysis helps you to identify both the positive aspects of the organisation’s activities, and also the negative or more risky areas. Typically the areas that may be identified from such an activity which would provide justification for holding reserves are as follows:-

To provide continuity of activities in the event of a large variation in income (eg a large funder pulling out unexpectedly).

To deal with emergencies (eg a major unexpected repair).

To deal with short-term fluctuations in cash-flow (eg a funder who pays in arrears).

To be able to develop new projects and grasp new opportunities as they arise.

 

The reserves policy should always be discussed, agreed and minuted by the management committee.

 

2. What level of reserves?

When setting your reserves level you should think about:

Your likely income in future years

Forecasts for expenditure in future years

Analysis of any future needs or crises which are not likely to be met out of income

The likelihood of those needs/risks arising.

 

The level of reserves is often expressed as a certain number of months worth of annual expenditure. For example if your normal annual expenditure is £40,000 and you decide that you need to keep your reserves level at 3 months worth of annual expenditure you would be aiming to have reserves of £10,000. In this case if expenditure rises obviously your reserves will need to go up too.

 

 

3. Achieving the agreed level of reserves

You should then think about the steps you need to take in order to achieve your desired level of reserves. According to whether you have too much or too little in reserves you will need to:-

increase/decrease fundraising for unrestricted funds:

and/or

increase/reduce expenditure out of unrestricted funds.

This can be done over a period of time. It may be helpful to set a target for each year of how much you intend to put into or take out of reserves during that year.

 

4. Reviewing the policy

It is important to take a fresh look at the reserves policy from time to time in order to adapt it if circumstances have changed for the organisation. An example of a change of circumstance would be if the work that the organisation does is seriously under threat because another organisation has just started doing similar work. I would recommend that the policy is reviewed every 2 or 3 years. The actual level of reserves should also be reviewed at least once a year by the management committee to make sure it is on target.

 

So lets hope that rainy day never comes, but if it does, that you will be prepared and ready, thereby enabling your organisation to face the future with confidence.

The Charity Commission booklet CC 19 is a useful resource on this subject and can be obtained by ringing 0870 333 0123.