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How should we be operating reserves?

samantha mccann Finance Director at St John Ambulance Posted 9 months ago

When calculating the number or months cover for reserves policy, I'm assuming that operating expense should be cash expenses and therefore exclude any depreciation charge?

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Stuart Davis Staff PANEL

Consultant at Stuart Davis Group 9 months ago

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Short answer: yes, ignore anything that isn't cash.

Slightly longer answer: if you're looking at a reserve that covers a certain number of months of operating costs, then the key thing is being able to pay staff and suppliers when they are due. Also, if you are VAT registered, that too. You need to cover what is unavoidable to get you through a tough time before more cash comes in. Ignore stuff that is variable that you would cut, and anything that isn't cash-relevant.

Longer answer for bonus points: the idea is to head off a risk of no cash for a short period of time. But is that your only risk? Could you cover having to close down? Or paying for a big project up front before grant funds come through?

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samantha mccann Staff PANEL

Finance Director at St John Ambulance 9 months ago

Stuart Davis many thanks

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Geoff Roberts Staff PANEL

Trustee at The Aire Rivers Trust and Participate Projects 9 months ago

....and remember that you may incur redundancy costs if you have to close down.

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Pauline Everitt Staff PANEL

Director at Hospice Care Kenya 9 months ago

Hi Samantha,

In addition to all the helpful advice that has already been given you, I suggest you check out the Charity Commission guidance https://www.gov.uk/government/publications/charities-and-reserves-cc19/charities-and-reserves

Most charities I have worked with keep 6 months reserves, but at the very least 3 months. Many charities had to use their reserves during Covid due to the loss of income, so it makes sense not to set your reserves at the minimum as you never know what's round the corner! I hope that helps.

Pauline

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Ian Burrows Staff PANEL

Investment Director at Rathbones Investment Management 9 months ago

Hi Samantha.

I'm not aware of any official or correct methodology for the calculation of operating reserves, rather I think that it's for your Trustees to decide what is appropriate for you. If your policy is set on the basis of allowing a managed wind-down in a worst case scenario then excluding non-cash costs makes sense.

If, on the other hand, the number of months is short-hand for the proportion of expenditure that your Trustees would like to set aside then you'd probably want to include those costs. In a 'non-worst case scenario' then those assets which the depreciation relates to will probably need to be replaced and so you could argue that it makes sense to set reserves to help accommodate that.

Basically it's up to you and I'd guess that any reasonable and well argued policy would be supported by your board.

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