The year 2020 has put more pressure on the sustainability of charities than ever before. The Covid restrictions and the subsequent economic hardships have severely hit charitable donations, and charities have had to adapt on the fly throughout the year to be able to continue to deliver their services.
But, once costs have been trimmed to accommodate the reductions in income, attention turns to the Charity’s reserves, if indeed they have reserves, and the extent to which Trustees should use the Charity’s reserves to maintain services. Reserves policies will have been carefully scrutinised. Reserves have traditionally been there to sustain the charity for a “rainy day”. Well, the Covid crisis has been as clear an example of a “rainy day” as possible. But, as the restrictions continue through 2021, what does this mean for a Charity’s reserves?
I offer a few thoughts and things to consider in this short article.
The Need for a Reserves Policy
It is best accounting and charitable practice to develop a clear statement of the charity’s policy on reserves and to publish it to the charity’s donors, stakeholders and beneficiaries. It is usual to have a paragraph under a specific heading in the Statutory Accounts setting out the Reserves Policy.
The Charities SORP requires a statement of a charity’s reserves policy within its annual report. In addition, if a charity operates without a reserves policy, the regulations require this fact to be stated in the annual report.
What should be in a Reserves Policy?
Detailed Charity Reserves Policy guidance was published by the Charity Commission under document CC19 “Charity Reserves – Building Resilience”.
The general rule is that Trustees must manage their resources responsibly and implement appropriate financial controls. They are obliged to protect and safeguard the assets of the charity, if there are any.
According to CC19, this means that Trustees should develop a reserves policy that:
- fully justifies and clearly explains keeping or not keeping reserves;
- identifies and plans for the maintenance of essential services for beneficiaries;
- reflects the risks of unplanned closure associated with the charity’s business model, spending commitments, potential liabilities and financial forecasts;
- helps to address the risks of unplanned closure on their beneficiaries (in particular, vulnerable beneficiaries), staff and volunteers;
- publish the reserves policy (even if not required to by law) and ensure it is tailored to the charity’s circumstances – it should not be just a standard form of wording. It should explain to funders, beneficiaries, the public and the commission exactly what reserves are kept (or not kept) for and when they are to be used;
- make sure that their reserves policy is put in place and operated;
- regularly monitor and review the effectiveness of the policy in the light of the changing funding and financial climate and other risks.
What is the right level of Reserves to keep?
The Charity Reserves Policy guidance on what should be the correct level is, inevitably, wide and unspecific leaving the specific details to the Trustees to consider, taking into account all the circumstances.
Rather unhelpfully, CC19 effectively says that Reserves must not be too high nor should they be too low.
Deciding the level of reserves that a charity needs to hold is an important part of financial management and forward financial planning. Failure to do this may result in reserves levels which are either:
- higher than necessary and may tie up money unnecessarily. Holding excessive reserves can unnecessarily limit the amount spent on charitable activities and the potential benefits a charity can provide
- too low, increasing the risk to the charity’s ability to carry on its activities in future in the event of financial difficulties, and increasing the risks of unplanned and unmanaged closure and insolvency”
At the very least, a charity should have a reserves policy which reflects strategy for an orderly closure in the event of an unplanned shutdown or insolvency. It is perfectly normal to set a range of reserves.
Most expert Charity Reserves Policy guidance seems to suggest that there is a legal imperative to spend reserves, rather than to hold on to money. The CC19 guidance is interpreted to show that it is important to explain why a charity is not spending its reserves. It is therefore possible to set a target for the spending of reserves over a manageable period of time
A Third Sector report from 2018 found that the 157 most prominent charities hold on average, 4 months’ worth of overheads in reserve. In a report from July 2020, BDO found that the Top 50 UK charities reserves had fallen to an average of less than 3 months, due to the impact of coronavirus.
It is prudent to keep an amount equivalent to overheads in reserve to enable an orderly wind down for the charity, if that should ever be required. The generally accepted practice for charities that do not provide ongoing services is to retain sufficient sums to cover the costs of redundancy and contractual notice for staff and to enable notice to be given on contracts for offices, utilities and other contracts.
Conclusion
Inevitably, much discretion is left to Trustees on Reserves and that is the way it should be. A charity that I am involved with has met monthly through the Pandemic, and, at every meeting, has received a presentation on the forecast use of reserves for the year to continue to deliver services. This has been a key part of the financial information that we have considered, alongside the P&L and cashflow forecast.
Reserves have become topical like never before, so I hope that you have found this guidance to be useful.