Q: We are setting our reserves policy. Can you tell us the appropriate level of reserves for a charity?
A: I am afraid there is no formula or generally accepted level. In its guidance, the Charity Commission says: "Responsibility for establishing an appropriate reserves policy lies with the trustees of each charity. So too does the responsibility for justifying and explaining what the charity is doing in that respect. It is not for us to substitute our own judgments for those of reasonable trustees who know the business of their charity, who have taken care to plan properly and who have justified their plans."
You should consider the circumstances and how 'sensitive' income and expenditure are to factors outside your charity's direct control. This would entail a form of 'what if?' analysis. This should also be coupled with 'how likely?' considerations.
Consider how much of your charity's income is fixed and how much is variable, distinguishing between income that is committed and irregular, one-off income. Although it is important to not to confuse a reserves policy with cash flow, the timing of the income streams and income recognition policies will also impact on the reserves policy. It is also important to analyse the volatility of expenditure. If your main cost is staffing, you might not be able to turn the ship when you see the rocks ahead. In such cases you need more clear water - or reserves.
You also need to look at the nature of your net assets and consider how much is readily available. What are the restrictions on funds? Can you borrow against property? You need to be prudent, but you should not simply create a policy to justify existing reserve levels. - Pesh Framjee is head of the non-profit unit at Deloitte and special adviser to the CFDG. No liability arises to the author, his firm or Third Sector. Send your questions to firstname.lastname@example.org.