By David Ainsworth, Sector Specialist, Charity Finance Group
Last week, The Times newspaper launched an attack on military charities for holding too much money in reserve. It claimed that the £275m held by the ten largest military charities was excessive, and accused them of "hoarding" cash.
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I’ve written here about why I think The Times piece is thin. It seems just to have decided that £275m is too much, without any attempt to assess what the right amount might be.
But (whisper it) there may be a shadow of a point here. It may be true that charity reserves policies are often not especially clear.
Reserves appear in the annual report, not the accounts, and in a number of cases, the reserves figure doesn’t match up with any of the numbers on the balance sheet. It’s often not clear how they’re derived, and the figure can vary widely when compared to both cash in hand and unrestricted funds.
Since The Times picked on military charities, the Royal British Legion would be an example. The legion’s free reserves are £70m, according to its annual report, but there is no calculation as to how that figure is arrived at. It doesn’t match up to a figure on the balance sheet, although there’s some explanation in note 28a to the accounts, which is not that easy to find. Even this note doesn’t give a lot of clarity.
I’ve heard a joke among auditors that charities first look at the amount of cash they’ve got left, and then create a reserves policy which produces that number. I’ve also heard the same auditors say they suspect that there are some charities which are so good at fundraising, and have such popular causes, that they simply have more money than they need, and perhaps do not want to admit it.
I’m sure that this is far from the case with any CFG member. And I suspect, given the scale of the social issues we face, that there are few charities which couldn’t find something useful to spend money on.
But unfortunately, given the relative paucity of information most charities give about their reserves, it’s hard to know for sure. It is problematic, for instance, that reserves are presented only in the annual report and accounts, and often don’t correspond to any figure in the accounts.
It feels as if we could set a bit more structure around how reserves are reported on. Particularly because it’s possible to argue that free reserves ought to be the most important figure in the accounts because this ought to be the figure which shows whether the charity has enough money to deliver on its mission in the future.
(As an aside, arguably the most important figure in the annual report ought to be a representation of public benefit – outcomes out for pounds in – which most charities do not report on at all. The excellent recent impact report from CLIC Sargent, based on the work of Martin Brookes, posits one way of tackling this issue.)
I’m not sure that the reserves figure does always do a particularly good job of representing charities’ ability to continue to operate particularly well, because it may not bear much resemblance to the amount of working capital. Turnover’s vanity, surplus is sanity, cash is reality.
Which leads to another question. Is the limited reporting on reserves a function of the fact that charities aren’t clear what they’re for? Or is the understanding perfectly good, and it’s just the way we’re supposed to talk about it that causes problems? Or is it, more likely, a bit of both?
Eight years ago, together with Acevo, the Institute of Fundraising and Sayer Vincent, we published Beyond Reserves, a good practice guide on how to look at this area. We’re now considering revising this guidance. If you’d be interested in taking part in a round table on the subject or contributing a case study, we’d love to hear from you.
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