A charity’s reserves can be complicated. They are often held in different types of funds (e.g., restricted, endowment, designated) and can be split between different asset types (e.g., properties, investments, cash).
Trustees should be able to understand the reserves held by their charity and consider what target level of reserves the charity should hold. Many charities still report a boilerplate 3 or 6 months of expenditure without true consideration of the types of funds and assets held.
These boilerplate policies are also likely to ignore a charity’s overall aims and objectives, future plans, and risk environment.
The Charity Commission (CC) has issued guidelines to support trustees in developing a reserves policy—it’s not easy! The guidelines consider the impact of holding too many or too few reserves. A level of reserves should be established that is right for each individual charity, and the charity should be able to clearly justify why this is the case. A link to the CC guidance can be found here.
For those lucky enough to hold reserves in excess of the required amount, consideration should be given to designating unrestricted funds to clearly show the financial statement users where excess reserves are earmarked for future strategic plans. Designated funds can also be used to separate the value of reserves held in fixed assets or investment properties (i.e., not readily available) from other unrestricted available reserves.
It is important to note that a decision on designating funds must be made before the charity’s financial year ends. This should be documented in the minutes of a trustee meeting.
For charities whose reserves fall below the required level, it is important to explain the plans in place to bolster reserves back to target levels. Applying for funding may be a key strategy in this plan, and funders will need to be comfortable that they are supporting a financially viable organisation.
In summary, there is no ‘one size fits all’ when it comes to holding reserves and developing reserve policies. Trustees should set a clear policy based on their specific circumstances and review it annually to ensure it is still fit for purpose in the sector’s ever-changing financial landscape.
