What are Reserves?
In simple terms reserves are that part of a charity’s unrestricted funds freely available to spend on the charity’s purposes. These exclude restricted, endowment funds and designated funds.
Whose responsibility is it to set a Reserves Policy?
It is the legal duty of Trustees to manage resources properly, failure to do so can result in the Trustees being held responsible for the consequences.
Why do I need to explain the Reserves Policy of the charity?
As well as being a requirement, you as a Trustee are looking for funds to help you run the charity, from donations, grants, government bodies etc. The Reserves Policy forms part of the Trustees Report, it is your opportunity to market your charity. If a potential donor looks at the charity’s accounts, which they will do, if the charity’s financial affairs look healthy compared to another charity, you could lose out as they might feel the other charity needs the funds more than your charity! Similarly, a potential beneficiary of the charity might read the Reserves policy and form the opinion the charity is not well run, and therefore might not use your charity.
What could the consequences be of getting the Reserves Policy wrong?
If the reserves are too high
• Could lose a potential donor
• Could indicate that the reserves are not being adequately used for the beneficiaries benefit
If the reserves are too low
• Run the risk of the charity not being able to carry on
• Trustees could find themselves responsible for the consequences
What should the Reserves Policy note say?
The policy should explain why the Trustees believe the reserves need to be at the appropriate level.
It should summarise where the Trustees believe the charity is financially situated, whether there are possible problems in the future which could give rise to requiring more funds.
If there appears to be excessive funds, the Trustees should explain why. What the funds are needed for and how the Trustees intend to distribute these to a more acceptable level.
Will the Policy remain the same?
What a charity needs at its inception changes over time.
As an example:
A charity’s objective might be to provide accommodation for its beneficiaries. In the early years, the Trustees might well be raising funds to purchase a property. In those years, every pound raised will stay in reserves. At a first glance the charity would look very wealthy, but reading the Reserves Policy a potential donor would realise that actually the charity is well short of its target and thus donate funds!
Later on, the charity owns the property, the reserves will now look good but in fact be comprised of a none cash asset, i.e. the building. How can the charity operate? It has a building but needs funds to run the charity, explain this in the policy note.
Adapt the policy note annually to suit the charity’s needs.
Are all Reserves the same?
Some charities are fortunate to have a benefactor but these might be endowments or restricted funds. The use of these can be very restrictive - explain in the note why the charity still needs further unrestricted funds.
If there is a specific project for the charity, it can make sense to move funds from unrestricted to designated funds and explain what the funds are being raised for. Whilst still unrestricted a potential donor will realise that your charity needs more money!
Protect yourselves as Trustees, maximise the sales pitch for your charity. Review your Reserves Policy annually and report it in the Trustees Report!
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