Charity Reserves - are they doing their job?
PUBLISHED: 12:13 05 April 2013 | UPDATED: 21:25 05 April 2013
Guy Biggin, Charities Partner at national tax, audit and advisory firm Crowe Clark Whitehill's Cheltenham office, explains
Charity Reserves are they doing their job?
Guy Biggin, Charities Partner at national tax, audit and advisory firm Crowe Clark Whitehills Cheltenham office, explains
Todays charity sector is being squeezed as relentlessly as every other area of the UK economy. But a proactive approach to treasury management policy and careful consideration of reserves can help to ensure that funding is still available to deliver key objectives.
Government spending in the charitable sector is changing, driving more and more charities to seek funding from the voluntary sector. And while the appetite of support for worthy causes remains strong, competition and need for their generosity is growing at an alarming rate.
The ramifications arent difficult to see and charities need to work harder to attract funding. The funding gap between income and expenditure is increasing and it is reserves that are plugging the gap.
Thats what reserves are for, of course. But its not always that simple. If these are restricted in any way, or are not easily available, it may not be possible to release reserves to cover overhead costs, even if they are indirectly related to the project in question.
Supporters and funders want to see the impact of their money. Very often this funding is restricted or provided to deliver specific services. The charity must therefore ensure that services are properly costed, enabling them to recover core costs and overheads.
This new normal means that charity trustees must be on top of their reserves policy. This requires an understanding of the charitys restricted and designated funds, to know what resources are needed to meet the necessary expenditure.
When considering the appropriate level of reserves, trustees must therefore consider the risks associated with different income streams and the impact of this on the desired level of charitable expenditure. Aligned with sound budgeting and forecasting, this will determine the short to medium term cash requirement and help drive investment policy.
Its important to make sure that all forecasts and budgets incorporate trigger points that are activated when there is a deviation from the preferred plan; the most crucial piece of advice to take onboard is to always have a plan B.
Then, for example, if there is a reduction in forecast income (and its important to quantify that reduction this is what will trigger the change in plan), its possible to seamlessly move over to plan B without disrupting the overall function-ability of the charity. Never has that old adage Cash is King been more relevant and any plan should factor in the actual availability of funds as well as the detail: how and when reserves can be crystallised in order to minimise any negative impact of having to dispose of assets at the wrong time is at least as important as the question: which assets?
The reserves policy should not stand still and trustees should be prepared to make adjustments at regular intervals, taking into account rising costs and the longer lead-time associated with fund raising.
Not only will this ensure that its possible to deliver on current objectives, but it will make sure that reserves are managed as far as possible to meet future objectives.
The good news is that there are always opportunities to raise money for different things just be sure that in doing so, you plan for core costs as well as specific projects.
Reaping the benefit of careful planning
A charity that relies on government funding for certain aspects of its activities has been building its levels of unrestricted reserves over a number of years to manage any potential future fall-away in funding.
Over the past 12 months, its concerns have been realised and its government funding cut, leaving the charity with a difficult decision to make: should it dig into reserves and continue funding the project internally, or should it close it down? Fortunately, reserve levels were sufficient to continue funding the project for the next two years, ensuring it would be successfully delivered and giving the charity sufficient lead time to initiate a new fundraising project. The trustees must now work on a new reserves policy that represents its new position.