Forum Brief: Charity reserves

A report from the Charity Commission has found that £5.5 billion has been held by charities in financial reserves without being accounted for by a reserves policy.

As a result the charity watchdog is calling on charities to improve their reserves planning and accounting procedures. The report also highlights concern over the one third of charities whose reserves are lower than the level that they need.

The Charity Commission asked the ePolitix.com Forum:

Forum Response: Charity Commission

Rosie Chapman, director of policy for the Charity Commission, said: "Reserves directly further the work of charities by safeguarding service delivery; but acquiring and managing reserves needs careful balancing.

"If set too high reserves tie up money which could and should be spent on charitable activity. If set too low, the future of the charity may be put at risk. The key question is not what level of reserves a charity holds, but why it holds them.

"All charities should undertake reserves planning, have a clear policy and publicly account for these funds. Most are finding that greater reserves transparency improves understanding with those who benefit from the charity's activities, the donating public and funders.

"One in three charities had a reserves policy at the time of our study. We're pleased that many more are now moving to get a policy and we want to see that trend accelerated."

Shirley Scott, charity finance director's group director, said: "Reserves are an indicator of health and sustainability in a charity and are an essential part of good financial planning. It is important that stakeholders should look beyond the headline figure of how much a charity has in reserves to examine why the charity is holding these reserves."Therefore it is vitally important that all charities have carefully considered the reasons why the charity needs reserves, for example to bridge cash flow problems; what level (or range) of reserves trustees believe the charity needs; what steps the charity is going to take to establish or maintain reserves at the agreed level (or range); and arrangements for monitoring and reviewing the policy."

Forum Response: Counsel and Care

Martin Green, chief executive of Counsel and Care, told ePolitix.com: "The Charity Commission needs to stop making banal comments and construct a fundraising regime which will enable to charities to build reserves and fundraisers to understand the need for core costs."

Forum Response: Voice UK

Kathryn Stone, director of Voice UK, told ePolitix.com: "Transparency in charity accounting is very important. Charities should have no difficulty at all being absolutely clear where there money is coming from and where it is going too.

"Fundraising and appropriate management of funds is an important part of the work of any charity and its processes must be transparent and accountable."

Forum Response: The Home Farm Trust

Brian Perowne, chief executive for HFT, told ePolitix.com: "HFT would always wish to be totally transparent with funders. It is of paramount importance that charities present themselves as open and honest, and welcome close scrutiny.

"However, funders vary in their financial astuteness and understanding. For those who are looking for good practice and financial management, finding appropriate reserves can encourage confidence and therefore giving.

For other funders, charities may need to spend time and effort explaining what the reserves underpin."

Forum Response: British Council of Disabled People

Andy Rickell, chief executive of the British Council of Disabled People, told ePolitix.com: " I think transparency is important, so that potential funders can understand the true financial position of a charity.

"I think where a charity already has large reserves, it is important to recognise the difference between reserves which are attributable to fixed assets and those attributable to ready cash. Only the latter is actually really available for supporting revenue costs.

"Speaking as an umbrella organisation of organisations of disabled people, most of whom are small and poorly funded, our bigger concern is funders' attitudes to reserves. For the same level of reserves, some funders are concerned that such a level is too low, while other funders regard exactly the same level as too high.

"Furthermore small organisations which most need a reasonable level of reserves if their existence is not to be continually under threat, are the very organisations who have greatest problems in being able to amass such a reserve. I think better education and more openness about reserves is needed all round."

Forum Response: Chartered Institute of Management Accountants

Richard Mallett, technical director of CIMA, said: "Charities should have practical, prudent and well thought out reserves policies that are fit for purpose, provide accountability and are clear to all their stakeholders.

"This is likely to demonstrate that management has thought through the way in which it manages its liquid assets and debt and is therefore an indication of good planning and sound financial management. In this context it is more likely to help rather than hinder fundraising."

Forum Response: Royal College of Psychiatrists

A spokesman for the Royal College of Psychiatrists told ePolitix.com: "Fundraising is getting harder and harder, and most big charities have a brand advantage over many of the smaller ones that makes their fundraising something of a self-fulfilling prophecy.

"Whilst I can understand the need to keep up awareness levels, it does seem unnecessary for charities with more than five or six years worth of operating costs already in reserves to keep fundraising at levels well above their expenditure. News like this is very bad for overall trust in the voluntary sector.

"Greater transparency would be a good start but without a mechanism to show which charities have more than enough money, how do people decide to break with old allegiances?"