OPINION: Reserve levels should match your insecurity

GERALDINE PEACOCK, chief executive of the Guide Dogs for the Blind Association

Close Wealth Management's report last week asserted that many charities are financially vulnerable as a result of stock market crises in the aftermath of 11 September. While this might be something of an overstatement, it has shaken the sector and posed some interesting questions about investment and reserves. It has also raised awareness of the need to develop sustainable income streams.

What it highlights for me is that charities need robust, publicly stated reserves policies that explain why they are needed. A "healthy

level of reserves has been seen by some in the past as a way of sitting on, rather than using, charitable funds. Indeed, when first appointed to Guide Dogs, I became weary of us being accused (ridiculously) of being a "fat cat

organisation because of the level of our reserves.

Stock market conditions have illustrated precisely why we needed that level of investment. Our reserves have taken a massive hit in the past few months and, had we suffered the same level of damage to a lower level of reserves, our core service - the provision of guide dogs - would be under threat.

A charity's reserves must reflect the vulnerability of its funding base.

If, like Guide Dogs at that time, your main source of income comes from public donations, primarily legacies, and you have a lifetime commitment to your clients, your reserve levels must be able to absorb a hit like that inflicted by stock market changes. If your funding base is vulnerable, you must retain a higher level of reserves.

That vulnerability also highlights the need to examine investment strategies themselves and the spread of risk. The current discussions about investment in property, hedge funds and venture capital, as well as the social investment and returns debate, are all vital in making charities wake up and ensure their reserves are working for them.

The real trick is to spread the risk by developing a diversified funding base where income can be managed and controlled. It is vital that a charity's core services run at break even, not at a loss, and this may involve cutting costs accordingly.

So the fallout from the stock market should be seen as a timely warning and an opportunity to think laterally while getting our financial houses in order.

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