The positive benefit of a reserves policy

Having a strong and robust reserves policy for that unlikely future “rainy day” where Charity’s see normal income streams being disrupted or eradicated has always been promoted as good governance and those charities that have developed an appropriate policy have benefitted from their preparation by seeing the unlikely “rainy day” event come to fruition due to the Coronavirus pandemic.

It is reassuring that as advisers I am pleased to acknowledge many clients have indeed taken heed of our advice and have subsequently portrayed exceptional governance during these unsettling times.  The result of which has seen some charities go from strength to strength by embarking on conversations with government funders to ensure the appropriate and correct level of funding is being received for the services they are required to deliver, which for many years have previously been underfunded.

In one case these conversations with government funding bodies, in part, supported by reserve policies, resulted in increased funding thereby halting the erosion of already depleted core funds, which were causing us concern as auditors over the Charity’s ability to continue as a going concern, together with mounting concern arising from the Charity’s bankers over whether sufficient securities were in place.

Furthermore, it has been a year for which many Charities have been extremely grateful for their loyal supporter base that has continued to make donations in support of the many worthwhile causes for which they are established.  A greater depth of understanding of supporter bases can only be for the positive and has driven more interaction and relevant communication, which will go some way to securing an income stream for the Charity’s sustainability.

Combining both positive outcomes from the pandemic allows charities to reconsider reserve policies, to ensure that the policy is still appropriate, is based upon the correct assumptions, looks to the future strategic direction and plans of the Charity and to find the right balance between the positives and the negatives that have been learned over the past year and previous experiences.  This is the perfect time for detailed considered thinking to be undertaken.

It then seems to me that I can only reiterate the importance of charities having a relevant and up to date reserves policy that is reflective of its general reserves needs and ignores any restricted, endowments and designated funds.  It is considered imperative for the policy to be clearly defined within the Trustees Report as part of the statutory accounts so that a reader of the accounts can fully understand that a large net asset value on the Balance Sheet does not necessarily translate into the Charity being awash with “free” reserves.

To illustrate this further:

As can be seen from above, on face value it could be assumed that Example 2 has ample “free” reserves when compared to Example 1, however, on closer inspection Example 2 actually has a deficit in its “free” reserves, whereas Example 1 is actually in a healthier financial position.

To reiterate an earlier point, it is therefore in the Examples best interest’s to clearly explain the reserves policy within the statutory accounts.