Funding story: When reserves are seen as a surplus

If disaster strikes, charities need money for winding up their operations - three months' worth is the bare minimum.

Ask funders and charities about reserves policies and they are, well, reserved. In fact, many are positively coy. This is partly because, as Rosie Chapman of the Charity Commission pointed out in Third Sector on 14 March, funders (and others) sometimes think of reserves as a surplus. It's also, however, because even funders that believe reserves are generally a good thing aren't always clear about what they think a reasonable reserve should be.

For their part, trust fundraisers say they get a varied response. Lisa Sutton, head of foundations at ActionAid, says: "Most larger bodies expect to see about three months' operating costs in reserves, but smaller trusts question why we're seeking further support."

Glen Whitehead, senior trust fundraiser at Shelter, qualifies this: "I think a funder would be more concerned if you didn't have enough reserves than if you did have reserves you need to justify. We've had to have conversations with three or four funders who wanted to know why we had a surplus from previous years; but we've had no problems explaining it."

As a rule, bigger funders - including Lloyds TSB and Comic Relief - are usually happy with reserves of up to 12 months' running costs. Northern Rock is enthusiastic about reserves of this amount, according to assistant director Rob Williamson. "If something goes wrong, it can realistically take six to 12 months to wind the whole organisation up," he says.

"It doesn't benefit the sector to be working with starved organisations; in fact, if they have a bit of money left over at the end of a grant, we tend to tell them to put it in their reserves."

The Allen Lane Foundation is a smaller funder and tends to question the worth of keeping more than six months' reserves - but in practice it can be even more flexible than some bigger donors. Heather Swailes, executive secretary of Allen Lane, says: "If you're running an old people's home, it could take you at least two years to wind up in an orderly fashion - on the other hand, if you have no employees and no premises, you could shut up shop in a month."

The picture isn't necessarily as gloomy as Chapman suggests: a reserve won't automatically be considered a surplus. But three months' money really isn't very much, so if many funders are still sticking with this amount, there's still a long way to go.

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