A recent Charity Commission survey revealed that 40% of charities were forced to draw on their reserves during the Covid pandemic; meanwhile other charities, unable to deliver services due to social distancing restrictions, have actually built up reserves to above their target levels.
Both situations are problematic for charities: a low level of reserves could indicate that a charity is not viable for the long term, whereas a high level of reserves could discourage funders from coming forward, thinking that the charity doesn’t need their help.
Despite the importance of getting the level of reserves right, the same survey found that 36% of large charities (generally those with annual incomes of over £500,000) do not have an appropriate reserves policy – a figure which is likely to be even higher for smaller charities.
The Charity Commission found that only 22% of charities’ accounts are correctly disclosing the actual reserves level.
The dangers of holding too little in reserve are obvious: as we have seen in the past two years, and continue to see, financial shocks can come out of the blue, and reserves are there to enable a charity to ride out those bumps and remain financially viable.
The problem of holding too high a level of reserves is less evident, but equally serious. With community fundraising still in the post-Covid doldrums, and statutory funding likely to remain under pressure for the foreseeable future, funders such as trust and foundations are likely to be vital to many charities.
But such funders take considerable account of a charity’s reserves situation when making their funding decisions. Traditionally they have viewed charities which hold significant unrestricted reserves as not being the most deserving of their largesse.
Many charities will have been unable to deliver some services over the last couple of years, and as a result may have reserves well above their target levels. These may be in the form of restricted reserves, donations and grants provided specifically to deliver those services (although most funders have allowed a degree of flexibility during the pandemic); these charities may at the same time be suffering depleted unrestricted reserves as core costs have had to be met during a period when fundraising has been difficult or impossible.
Charities affected in this way will need to look to their funders to be sympathetic, and could possibly discuss the option of reallocating previous restricted grants towards other projects.
What is certain is that funders are currently looking sympathetically at such situations, but it is far from clear how long this attitude will last. What is sure is that those charities which do not have a very clear reserves policy are less likely to be on the receiving end of such flexibility.
For charities which have accumulated high levels of reserves, especially unrestricted reserves, there will be a temptation to designate such funds to specific projects. However, such funds will still form part of the organisation’s unrestricted reserves, so a clear demarcation of how those funds will be spent, on what specific projects and in what timescale, will be important to persuade funders to disregard that portion of the free reserves. In fact, the Charity Commission expects any designated funds to have a specific purpose with set timescales for future spending.
Of course, it may be that the reserves policy needs to be changed to reflect the current financial uncertainty, and that may involve holding more unrestricted reserves, to protect against investment risk, for example.
For those charities which have depleted their reserves, urgent action is required. Trustees are required to ensure that he charity has sufficient funds to be viable (the exact definition of this should be in the reserves policy), and so reconnecting with community fundraisers and volunteers – many of whom may not have felt able to serve during the pandemic – is a key task.
After an unprecedented two years, and with the financial future as uncertain as it has been for a very long time, all charities should be reviewing their reserves policy (or if they don’t have one, creating one) as a matter of urgency, to ensure that their organisation is not just sustainable, but also able to attract funding for the future.