Matthew Sherrington: Who is responsible for a charity's reserves?

The collapse of Kids Company highlights the importance of putting money to one side, but charities face numerous obstacles to doing just that, writes our columnist

Matthew Sherrington
Matthew Sherrington

You might have heard of donkeys enjoying gold-plated retirement in sanctuaries so flush with reserves pumped by legacies that rubberised floors cushion their knee joints and their life expectancy doubles. Yet people still give.

Another charity I know provides life-long residential care to disabled people, and is also flush with reserves pumped by legacies. So much so that the Charity Commission advised in the 1960s that it stop fundraising altogether, which it did until an actuarial evaluation showed it lacked the funds to guarantee life-long care just for existing residents. Yet various trusts and foundations won’t give to new programmes because they are "too rich". Indeed, just having more than 12 months of operating costs in reserve can be an obstacle. The Charity Commission recommends several months’ worth.

Reserves are in the spotlight in the wake of the collapse of Kids Company, leaving high and dry their children, clients and staff alike. It apparently had no reserves whatsoever, putting all its money into services, and has been roundly criticised for it. Damned if you do and damned if you don’t?

In the case of Kids Company, there’s now a Charity Commission inquiry into financial mismanagement. Whether or not there were irregularities, it is clear that setting aside no reserves at all was highly irresponsible, negligent even, and the trustees have questions to answer. Two finance directors knew it and resigned. Charities might want to spend all their money on their services, but they are subject to employment law like everyone else and need to make provision for an ordered wind down in the worst cases.

To understand reserves you have to understand the difference between restricted and unrestricted income. Reserves, of necessity, are built up from unrestricted income. Who’s going to give you money specifically to put in the bank for a rainy day? But who gives the unrestricted donations that you can put into reserves? It's unlikely to be the statutory bodies subcontracting service delivery to charities. It’s rarely trusts, foundations, companies and even major donors, who largely have their funding restricted to projects. Ideally there should be a proportion of unrestricted "overhead" contribution. You’re doing well if you get that.

Charities themselves might be bad at asking for overhead contributions ("full cost recovery", to use the jargon), or they might not want to, thinking their own funds give their programmes a veneer of independence. Trustees have a responsibility, but is it all on their shoulders? (Yes, in the case of Kids Company – it had plenty of unrestricted income.) It’s a bit rich for funders to be sniffy about a charity’s reserves if they aren’t prepared to contribute something to them, in the interests of organisational stability. They are, after all, the donors who better appreciate organisational budgeting and the importance of sustainable funding.

In effect, they are expecting individual donors to fund the boring stuff while they get the cherries. As the takeover of Merlin by Save the Children in 2013 illustrated, financial instability comes from having inadequate unrestricted income, however large, professional and respected the charity is.

Charities have to ensure they are managed well and have reserves. But funders need to put their money where their mouth is, if they are truly concerned about organisational sustainability, and pay their share of the overhead that helps build a safety reserve up.

Matthew Sherrington is an independent charity consultant at Inspiring Action

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