Is it time to review your charity’s reserves policy?
As public scrutiny increases, charities need to consider if their reserves levels are still appropriate.
Many charities could be judged to hoard financial reserves to protect their long-term existence. In doing this, they fail to meet the general public’s need for transparency on where donations go.
Storing high levels of reserves can lead to both complacency and poor financial practices for charities. Rather than deciding that 3, 6 or 12 months’ worth of reserves are required, charities should consider their financial risks to determine their ideal level of reserves based on those risks. To achieve this, charities should:
- understand the nature of the reserves they hold and what the reserves can be used for. Many larger and some smaller charities have numerous funds including restricted funds and endowment funds. Trustees should have a clear understanding how each of these funds can be used so they can determine how much of each type needs to be held.
- draw up a risk profile to determine the relative reliability of each of their funding sources. Charities with predictable, secure income streams have less neeed of reserves than charities with more erratic income streams.
- analyse what they spend and when they spend it, then assess what expenditure is delivering value. Can the timing of cash outflows be altered to free up reserves? Can some expenditure be stopped completely?
Not all charities need, or should aim to have, large reserves. Reviewing risks and cashflow patterns enables charities to determine their optimal level of reserves. This allows them to show that their income is used efficiently and effectively, which will help to improve public trust.
For more information on reviewing your charity reserves policy, contact Elizabeth Irvine.