How, as a charity, are you going to continue offering what you do?
How will you grow and develop your services?
Where does the charity want to be in 2, 3, and 5 years from now?
And, what happens if something goes wrong?
This is where planning, budgeting, and, more importantly, your reserves policy come into play.
Helping you to better prepare for the future and all the eventualities that may come your way, while maintaining sustainable services, think of your reserves as your contingency budget. The pot of money that is accounted for but reserved to cover you when your charity needs it most.
Unrestricted funds
Charity free reserves are part of your unrestricted funds. Funds that are unspent and freely available to spend on any of your charity’s outlined purposes when required.
This is an important number to understand and is calculated by taking your total funds and subtracting your restricted funds, designated funds, and any fixed assets.
It is this element in a charity’s financial planning that helps provide assurances that the charity will be able to continue functioning and operating when a difficult situation arises. For example, when the funding you have budgeted for falls short, or you are hit with unexpected building repairs that require immediate attention.
Reserves are vital for charities to support this level of risk management, providing a buffer against uncertainty to ensure continuity of services.
Benefits of aligning reserves policies with strategy
Reserves, as we know, help to protect charities against unplanned income shortfalls or unexpected expenditure outlays.
However, your charity reserves policy can offer so much more when we align it with the charity’s mission and strategy.
Helps to plan for the future. What key plans are on the horizon for your charity, and how can you use your charity reserves to support these? Consider both short-term and long-term plans, as well as the levels you will need in order to maintain services and support future growth. Do you want to allocate specific reserves for specific projects, (for example, you need to upgrade your IT software), where elements of funding are not freely available for use but earmarked for future projects (recorded as designated funds)? How will you manage uncertainty and ensure sustainability?
Supports your risk register. Your risk register must be reviewed regularly, with both your strategy and reserves policy linked to the register, considering the financial impact of the noted risks and how they will affect your operations. For example, what is the risk of a funding shortfall? Will changes to government policy affect future funding? Knowing this and planning for it within your reserves policy helps build confidence and assure funders, donors, and the public that the charity is stable and will remain so, even in challenging times.
Supports capital expenditure plans. If your strategy includes significant capital plans, then you must communicate and provide full details on how these will be funded. For example, is this entirely from reserves? What will happen if there is unexpected expenditure, and how will this affect day-to-day operations?
Aligning your reserves policy with strategy
- Assess your current position. What is working, what could be improved, and what could you do more/less of?
- Set a specific reserves target that aligns with strategy goals and objectives. What are your short-term and long-term plans and projections for the future? Do you notice a funding shortfall in a particular area? If so, what percentage of the reserves would be required to make up for this and keep services running? Do you want to build and grow services, using some or all of the reserves over a set period? How will you manage this?
Ultimately, do you know what funds you would need should the worst happen and the charity needed to close? This figure should be your minimum level of reserves. - Incorporate all future potential risks and opportunities, and outline how the reserves policy reflects these potential impacts.
- Integrate your reserves target into your overall financial planning and record this within your annual accounts.
- Regularly review, monitor, and communicate your reserves policy. With complete transparency, what free reserves the charity has and how these are being used alongside the strategy.
Role of trustees in reserve policy setting
Trustees have a duty to ensure that an appropriate reserves policy is in place for the charity and includes
- A definition of what the reserves are for.
- The level of reserves held.
- An explanation on why this level of reserves has been set. For example, without explanation, holding excessive reserves may be seen as ineffective and could, in fact, damage the charity’s reputation if people believe it is holding onto money rather than using it for needed services.
- Monitoring and management. How will reserves be spent, and who is responsible for managing this? Provide full transparency, ensuring that your reserves policy continually reflects the charity’s strategy and future activities.
- Review and report. A charity’s reserves policy must be included in annual reports, clearly stating reserve levels and linking the financial planning and risk assessment to the charity’s mission and budget.
Trustees have a duty to manage the charity’s finances and not expose the charity to undue risk. Trustees can provide confidence to donors, supporters, and service users through a comprehensive and fully transparent reserves policy.
Planning for the future
Your charity reserves policy is vital in providing you with oversight, a financial safety net to ensure operations and services can continue, and support when you need to make some of the most challenging decisions.
Your reserves policy is not about hoarding funds or a compliance ticking exercise. Your reserves policy should be integrated into your strategic plans, outlining how you plan to create stability and build resilience, ensure sustainability, and provide support for future growth.
If you would like support with your reserves policy and financial reporting, book a discovery call with us today.
