In almost all of the seminars I have spoken at or attended over the past year, one thing I have been asked about repeatedly is the level of reserves that charities should hold. Some charities have told me they’ve been discouraged by key funders from holding reserves, presumably on the basis that the charity should be at poverty’s door before it asks for any more grant support. Others have been refused funding because their reserves were too low and the grant-maker didn’t want to risk a project failing and money being misapplied. You can see some logic behind both approaches, but I would argue that both of these approaches contain serious flaws.
For funders to insist that a charity should have either no or very low reserves before seeking a grant would be to encourage charities to exist on the edge constantly. A charity in that position would not know from one month to the next whether it could meet its commitments and perform an orderly winding up if matters came to the worst. Equally, funders insisting on high levels of reserves do nothing to help those lean charities that manage to get by with little in the bank, but which also need a fair degree of cash flow from donations to sustain project work.
How can a charity deal with the headache of reserves when the approach can differ so wildly? The answer has to be for charity trustees to trust their own independent judgement on reserves. If that means some funders will be a bit shy of giving further support, that fact could be taken as an opportunity to open a dialogue with the funder on the charity’s position overall. I know from the experience of many clients that this often ends with a positive result. On the other hand, funders that use the reserves point as an excuse to decline an application might not be worth focusing on for too long – a grant-maker who is genuinely interested in supporting your work will generally let you know, even if they do have a query about reserves policy.
Ultimately, it would be irresponsible for a charity to maintain a zero-reserves policy. Quite apart from the harm that can do to cash flow, a lack of reserves might shrink the charity’s financial viability to danger point. If a board can’t see how it could cope with three to six months of income shortage, there is an argument that the board isn’t doing its job properly. Regulatory examples from across the UK consistently make this point to the sector as a key lesson arising from charity failures.
Knowing how much to hold in reserve can be tricky for charity trustees to work out, and there is certainly no single answer that would fit the entire sector. But it seems obvious to me that this is a topic boards must take seriously, particularly in a climate of reduced government funding, increased demand for charity services and downward income trends overall. Developing a reserves policy that suits your charity and its operating environment, then seeking to apply that policy, should be a crucial task for all charity boards.
Gavin McEwan is a partner and head of charities at the firm of solicitors Turcan Connell