What are reserves for and not for? How much is too much and too little? And do charities need to better communicate their reserves policies? CFG's CEO, Caron Bradshaw OBE, shares some thoughts.
As the team here at Charity Finance Group have been considering our financial position, and prepare our budgets for the next financial year, I've been reflecting on free reserves and how they relate to reserves policies.
Many charities will be using policies written pre-pandemic that do not reflect the risks we now face. Few will have dynamic policies that flex with circumstances enabling them dial up or down according to present need. Most reserves policies will be based on accounting periods, not real life.
The first thing to say is there is no right or wrong answer on what to keep in reserve. The decision should be based on the risks you encounter and the sums you feel you can justify retaining because the presumption is to spend unless you have a good reason not to.
Some charities will have reassessed their basis for retaining reserves and determined that they can get by with less. Others will have had no real choice but to spend reserves to keep things going and, therefore, will be operating with fewer reserves than feels comfortable to them. Some charities will, on the face of it, look like they're riding high, awash with money.
But look below the surface. Having 'excess' reserves based on a policy, which may have been written before the cost of living crisis and soaring demand, may be essential at this particular time. Charities are trying to balance current and future beneficiary need, the need to invest, to safeguard against recession, to meet rising demand, to support staff.
Avoid the temptation to damn them because they hold 'too little' or 'too much' in reserve, or jump to easy conclusions.
To any charity currently wrestling with this conundrum, and thinking about your annual report and communications, remember that there is no perfect equation you can apply.
Tie your reserves calculations to your risk profile and explain why you are keeping what you are in reserve.
If you genuinely assess you have too much, have a plan to spend it down. But keep an eye on hard-wiring in costs that are not so easily unwound.
You cannot fund the future on reserves alone. You must be able to balance income and expenditure over the longer term.
Conversely, if you have too little, but don't know how to rebuild reserves in resource-constrained times, know that you are not alone!
Articulate your pathway to rebuilding your reserves over a realistic time horizon which may include living with reduced reserves over the longer term.
Either way, seemingly inadequate reserves or, conversely, seemingly excess reserves require good communications for your stakeholders. Be clear, be brave and recognise we live in massively uncertain times.
Reserves are frequently misunderstood so take time to explain them!
Learn more about charity reserves
Scottish Grantmakers will be running a free-to-attend online event on Wednesday 22 February on effective and modern reserves management. Join CFG’s Director of Finance and Operations, Rui Domingues, and other charity leaders to discuss current theory and practice around reserves management. Book your free place now!
For more insights on reserves, read Caron's 2021 post 'Rainy Days and Reserves'. Our publication Beyond Reserves is still worth a read and in 2023 will be brought right up to date.