I don’t like charities having reserves. I don’t like charities having money set aside for some future ‘rainy day’ rather than using here and now. It doesn’t seem right to me that a donor should give money, only to see it stored up for future use. The most recent data I can find is that in 2001 charities had reserves roughly equal to the total sector income for that year. A whole extra of year’s worth of good work, not being put to good use.
The current climate is terrible for charities. The last few years have battered non-profits with the cost of living crisis, covid, and a decline in government grants, contracts and funding. If this isn’t the rainy day when charities should be using their reserves, I don’t know what is.
It’s worth pointing out that the vast majority of charities have the opposite problem of excessive reserves. They are struggling to stay afloat. They are cutting posts and programmes. Which makes it even more of an obscenity for some charities to say they are keeping their reserves for a rainy day, while others are being swept away by the deluge.
Charities often have a strange attitude to financial risk. I have been on the board of a charity which had ten times its’ annual expenditure in reserves, but still said it might run out of money. When I asked if the staff felt this was the case, it was clear that it was the trustees who worried. As a trustee of a grant maker, I asked why an applicant had 13 x their annual expenditure in reserves – oh the trustees are very risk averse was the response. No shit Sherlock!
The strange discrepancy with personal, business and government reserves
One of the oddities of charities and reserves is that are a unique feature of our sector. Most of us personally have mortgages, debts, for our adult lives, not a massive pot of money we never touch. Government is up to its’ eyeballs in debts – currently an amount equivalent to our entire economy. Any finance director of a company who sat on twice their annual income would probably get the sack for not sweating their assets. Yet for charities it’s okay to have large amounts of money not doing very much good.
The official view of the regulator
I often hear people say that the Charity Commission recommends such and such a level of reserves. They don’t. It might be good if they did. In reality they say in their (rather verbose) guidance it’s up to the charity to think carefully about levels of reserves (https://www.gov.uk/government/publications/charities-and-reserves-cc19/charities-and-reserves ). As long as a charity can explain its reserves, that is OK with them. It is also worth saying that reserves are not restricted funds, or money held for specific purposes. In the Charity Commission’s accounts reserves are called ‘long-term assets’ and they define long-term as more than 12 months.
The metric of months expenditure in the bank
Charities often measure reserves by ‘x months of expenditure in reserve’. In practice this is a pretty poor financial measure, because it’s a scenario that is so unlikely. Has any charity had all its income stop overnight, with no warning, and then had to live on its reserves. The most likely worst case scenario is the end of a large contract, but that at least would have several months’ notice (unless the funder was USAID but that is another story). A charity in most scenarios would be able to restructure, cut posts and expenditure, and recalibrate. How much money does it need to do that restructuring is the real metric.
That said it remains a crude metric which is useful for those inside and outside the organisation – very few organisations need more than 12 months expenditure to restructure for a rainy day.
Why might a charity need money for a rainy day?
There are several reasons a charity might need surplus money in the bank:
·Working capital to see it through the ebbs and flows of different levels of income and expenditure. Often 3-6 months of income
·Because of known future need for large or capital expenditure – replacing lifeboats is a classic example often given.
·Because of a forthcoming capital project – funding a new building and the like. This might look like a reserve because it may not be a designated or restricted fund, but it is kept fluid because the charity is earmarking, rather than donors giving it for that purpose.
·Money given for a specific purpose – again this is not typically a reserve but may look like it in the accounts. Money given for an emergency appeal is better spent over years not months is a good example.
Its worth pointing out that lots of even very large charities often have negligible reserves. For example, in the most recent accounts Oxfam on a turn-over of £368 million, has reserves, long-term assets, of just £13.9 million, and working capital of about £162 million.
Towards a better way of looking at reserves.
In a world where almost every aspect of life for those that charities exist to help is tougher than ever before, reserves are even harder to justify.
So I think a guiding principle for reserves is simple: a charity needs a very good reason to have more than a year’s turnover in reserve.
There are a number of other key approaches that I think are vital:
Have a compelling story to tell on your reserves.
If you are going to have reserves of any substantive size, then its vital to have a good story to tell. Explain how and why those reserves are needed and will be used. If you have reserves for a rainy day demonstrate how important reserves are to help you get through those difficult periods. Part of the problem with many reserves policies is that the rainy days never seem to come that use them up, when one look at the weather outside would tell you it’s a storm.
Invest for income, impact and innovation!
Reserves can be a fuel for making a better organisation. If you have excess money that you don’t need to for this year’s activities, use it to make next year’s organisation even better: a new database, a new website, additional posts looking at research, impact or innovation. The kinds of activities that are important but not necessarily urgent.
What would your donors say?
A simple test of whether your reserves can be justified is could you explain to your staff why they aren’t getting a pay rise, or your donor’s why their money isn’t being spent - why you need money in reserve rather than being used today. Indeed try it for real. Ask your fundraisers whether they think your reserves make it easier or harder to fundraise.
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