- many charities have low levels of reserves, equating to less than one month of expenditure for over one fifth of organisations with one tenth of charities having a few days reserves, or less;
- there are variations by size, with organisations in the £500k – £1Mn range being slightly better placed than the very largest organisations;
- reserve levels are likely to be lower for organisations whose main income source indicates a reliance on sales of services and contracts, rather than on fundraising or donations;
- longer established organisations have higher levels of reserves;
- the field in which charities operate matters – for example, charities that operate internationally tend to have lower levels of reserves than charities involved in research or in housing.
- 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
- larger charities are required to publish their assessment of the risks that the charity faces and how to manage them in their annual report
- 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
- all the payments the charity will have to make over a range of different timescales (for example, the next few weeks / month / three months / six months)
- what cash is currently available to cover payments as they fall due
- what income the charity realistically expects to receive over the same timescales based on a best estimate.
- be able to move the charity to recovery and a return to a more normal operating environment and what will indicate that this is achievable, or
- need to consider closing the charity and the trigger points that will indicate this. To support this decision, it is helpful to have an understanding of the likely costs of closure. The government has introduced some relaxations to insolvency law for companies and CIOs and directors of charitable companies should take advice on how this may affect a decision to close.
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