NPC recently hosted an online seminar, in partnership with the Clothworkers’ Company, on what trustees are and should be doing to manage their charity’s reserves. Chaired by Sarah Broad, Chief Operating Officer at NPC, our speakers were Jill Halford, Head of Charities at BDO, and Rohan Hewavisenti, Chief Financial Officer at Amnesty International.
It’s okay to spend your reserves, in a thoughtful and considered way. That’s what they’re there for. What’s more, it’s okay to change how you spend them—nothing is set in stone. This is what we discussed at our event on reserves policies in November. Ultimately, charities should do what feels right, because one size will not fit all in these uncertain times.
Why are reserves important?
Reserves are meant for a rainy day, and Covid-19 is undoubtedly such a day. The sector is experiencing a substantial loss in income this year because we have seen the closure of charity shops and the cancellation of many major fundraising events. In this climate, reserves are necessary to keep your organisation going. At our seminar, Jill listed five types of reserves that charities should consider holding:
- Income risk reserves—to protect against a fall in income levels
- Cessation reserves—how much you would need to wrap up your organisation, servicing all obligations
- Working capital reserves—required if expenditure for an activity is needed before you receive the income to pay for it
- Opportunity reserves—to fundraise for new initiatives
- Adversity reserves—to protect against unplanned adverse events
In order to have clarity when making decisions, it’s necessary to know how much money your charity has in reserves, and how this figure breaks down into the different types of reserves listed above. Being clear on this will also help you to communicate more effectively with funders, who will want to analyse your charity’s reserves, to test your charity’s solvency and need for funding.
Top tips for trustees
Trustees should check reserves levels regularly. Jill emphasised that calculating your reserves shouldn’t just be an activity for the annual report, especially not in these ever-changing times. Having an awareness of which funds are currently accessible and which are, for example, tied up in property, is very important.
One of the most insightful audience contributions at this event came from Lynn Hendry, an advisor to the board of the Scottish fundraising platform Kiltwalk. She explained that simply putting down that you have a three-month or a six-month reserves policy doesn’t give funders enough of a sense of the direction of the charity. It’s better to clearly indicate how reserves are going to be used in the organisation, for example for moving office or for investing in digital upgrades. As Jill explained, a detailed policy should indicate your range of reserves and show how your reserves policy ties in with the charity’s wider strategy.
Both Jill and Rohan emphasised that charities shouldn’t hold too few reserves, but also shouldn’t hold too many either. Too little suggests poor financial management; too much and funders may suspect that you don’t really need their funding. Jill recommended taking a risk-based approach to determining what level of reserves you hold. This entails looking at each of your income streams and understanding their certainty and their risk. The risk rate for each stream will keep changing as situations change, so schedule in some time for regular reforecasting exercises.
Charities should be willing to spend their reserves though, especially now. Rohan urged trustees not to just sit on a pot of cash. The time to let your reserves go below your usual minimum level is now, because Covid-19 is an exceptional circumstance and being able to spend to keep going through exceptional circumstances is one of the reasons for building up reserves in the first place. However, it is also important to remember that nothing is set in stone—it’s okay to change. How you designate your reserves now may not be the way you want to allocate them in the future. For example, you might initially focus on adversity reserves, before shifting to emphasise opportunity reserves. This also means the level you set for your reserves can change—and that’s absolutely fine.
Both Jill and Rohan emphasised that it’s up to you, as a trustee, to judge what level of reserves is appropriate, because every organisation is different. Do what you feel is right. One size does not fit all; the reserves policy should be tailored to your charity.
Key points for funders
This blog has so far focussed on advising charities, and their trustees, about setting and managing their reserves, but it’s also important for funders to understand reserves and to know what questions to ask about them.
Evaluating a charity’s reserves is crucial when completing due diligence and making decisions about grants. The charity’s accounts are an obvious place to start, since that’s the only document in the charity sector which requires third-party verification in order to be issued. However, funders should consider that there will be charities who are currently delaying the issuing and signing of their accounts until they have more certainty, as Jill noted. The date at which accounts were issued will therefore affect the usefulness of the information within.
But funders shouldn’t just look at the reserves disclosure or the bottom of the balance sheet when making decisions about grants. We encourage them to read a charity’s accounts in their entirety, including the notes at the end. Sometimes, commitments are not booked on the balance sheet but come through in a ‘commitments note’. To assess the solvency of a charity, Jill recommends looking into the asset and liability split of a charity by funds. This note can tell funders a lot more about the liquidity of unrestricted funds, and about what a charity has tied up in restricted and designated funds, enabling more thorough due diligence to take place.
You can watch the full recording of this seminar below. We are also delighted to once again be in partnership with the Clothworkers’ Company for the Charity Governance Awards. Is your charity governance award-winning? Recognise the achievements of your trustees by entering the Charity Governance awards 2021. You can find more info on all the award categories and how to enter here.