91探花

‘Reserves are that part of a charity’s unrestricted funds that is freely available to spend on any of the charity’s purposes.’ -

The level of funds held is more than just a statement about the financial health of your charity. Ultimately, reserves show the financial strength of your charity. They reflect not just how much money you have in the bank, but the unrestricted funds that are freely available to spend on your activities, after accounting for fixed assets and future spending plans.

A robust reserves position sends a clear message to funders and beneficiaries that you are well-led, managed and run. 

Charity trustees need to work out how much the charity needs to keep in reserves. Too little, and you could be exposed to shifts in donor contributions, contracts or fundraising. Too much, and questions could be raised about whether you are managing resources in the best interests of beneficiaries.

In uncertain economic times, financial resilience will help charities remain flexible and adaptable so they can continue to fulfil their commitments to beneficiaries. The existence of a well-thought-out reserves policy linked to your strategic plans is more important than ever and should be reviewed at least annually.

Reserves policy and target setting

The starting point is to calculate your charity’s existing level of reserves. The policy should be set to include a target level of reserves. 

Your charity’s strategy will play a key role in planning how the target will be achieved, taking into account levels of general, designated and restricted funds. 

Depending on your needs, the target may be a specific value to enable a particular project to go ahead. Alternatively, it could also be a range that the charity trustees believe is sufficient to cover their liabilities and a specified number of months’ expenditure, should there be an unforeseen decrease in income. The target could also be a percentage of income.

Linking the target to the budget is crucial to enable monitoring of income and expenditure levels over the period in which the target level is to be met. This will highlight any challenges over the forecast period. It should also form part of the charity trustees’ consideration of the going concern assessment.

Monitoring target progress 

Very few charities hold the optimal level of reserves. If you are below your target level, your plans should include how you will raise more funds, diversify your funding base or mitigate risks if the charity had to close suddenly.

If you are operating above your target level, charity trustees will need to explain whether excess resources could be effectively spent on the charity’s purposes. 

A target is only valuable if charity trustees continuously monitor their progress. This monitoring could be incorporated into the review of the quarterly management accounts, including a comparison of budget versus actual spending. 

Charity trustees should clearly state whether the target has been met each year and provide explanations for any deviations from it.

This article is part of RSM’s Charity trustee insights hub. It has some great insight pieces for charity trustees to consider on key topics right across the charity sector, including governance, reserves, digital transformation and finance function, to name a few.

If you would like to discuss the importance of reserves for your charity, please contact Nick Sladden, Zoe Longstaff-Tyrrell or your usual 91探花contact.