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Leadership & Governance
Financial Reserves and Trustee’s Responsibilities
Mike Preston Between Roles at Between Roles Posted 4 years ago
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Key findings
- 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.
Full Report Here
Expectations of Trustees
In practice, 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
- 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
Steps to Managing Challenging Financial Situations
Step 1: Consider your current financial situation
It is important to make sure you have as accurate a picture as possible of the current and immediate future operations and their financial implications on the charity. This will help you to identify the urgency of any actions and the time you have available to develop and implement a plan to respond to the financial pressures.
Focus on cash flow management. Identify:
- 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.
Step 2: options for minimising costs and protecting and increasing income
Having sufficient cash flow to continue to operate is vital: minimising costs and maximising income will, obviously, help improve your charity’s position.
Minimise Costs: Idenitfy and Stop Costs; Reduce Costs’; Share Costs and Reallocate Resources
Conserve or Improve Sources of Income: Talk to Funders; Emergency Appeals; Secure Grants or Loans; Use of Reserves;
Step 3: Keep the charity’s operations and finances under regular review and take any additional actions
Throughout the current crisis - and beyond - robust, frequent monitoring and review will help you manage your finances and assist you in deciding if you can continue to deliver your charitable activities. Where possible, continue to maintain the cashflow forecast described in step 1 so that you have an up-to-date forward-looking view of when money will be received and spent. Whilst it may be difficult to forecast and budget in the current climate it is this monitoring that will help you manage the situation. It is also helpful to plan for when you might either:
- 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.
This week, we trying to get charity talking and sharing their knowledge and experience, so get involved using #CharityTalk20 and let us know how your organisation manages their reserves policy. How's developed and agreed, and what the trustee's don't agree on something?
If you liked this blog, you can read more of my articles here.
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