Charity reserves: building financial resilience

Giles Kerkham

There has been a significant change in the focus of the Charity Commission’s guidance on reserves (CC19 – revised in 2016). The new key messages include underlying steer towards keeping reserves to address risks of ‘unplanned closures’ and to plan for the maintenance of essential services. This is a turnaround from having to justify why reserves are being retained, to requiring an explanation as to why they are adequate.

The regular reference throughout CC19 to ‘unplanned closures’ has found accusations that there will be an unwarranted fear instilled in trustees wanting to hold on tighter to reserves ‘just in case’ and that building resilience equates to building savings. This need not be the case, but in the light of the new guidance and recent publicised charity failures, there is certainly now an opportunity for a charity to be confident in making plans to build reserves.

There has always been an onus on trustees to be aware of their reserves, to understand what they have and why they need it. Perhaps the discipline to review and reflect on this on a more regular basis and the need to record and report reserves more explicitly might be the only change required.

There is no correct answer, of course. Each charity must consider its own position, be aware of the threats and opportunities ahead, and create a reserves policy that is both resilient and open to flexibility on its way towards achieving its objectives.

With MHA, our national network, we have created ‘Keeping Your Charity on the Right Track’, a 12 month programme to help you improve your organisational governance in a stepped and measured way. Each month’s article covers an area of charity governance for review. This month’s article reviews the changes in the reserves guidance, and includes a high level checklist for the month:

  • In terms of reserves, think liquidity and availability – how much unrestricted cash and net current assets do we have?
  • Have we reviewed our liquidity requirements recently? What might be excessive (indicating either lack of focus on the frontline objectives, or simply no requirement for funding) or not enough (vulnerable, perhaps also with weak planning)?
  • Is our reserves policy a sustainable model that allows us to meet our objectives and requirements for service delivery?
  • Have we adequately documented our policy and our reasoning behind it? Explanation of the level of reserves is key to get right when trying to attract funders.
  • Can our reserves be invested for a financial return, whilst still remaining a liquid asset?

If you have any queries please do not hesitate to contact a member of the Larking Gowen Not for Profit team  on 01603 624181 or charities@larking-gowen.co.uk