Reserves and funders – damned if you do, damned if you don’t

Charity Trustees have a very difficult balancing act when it comes to managing their financial reserves.  On the one hand they need to hold funds to manage the risks. This is especially true in this difficult time – recently described to me by a charity CEO as “hostile, unpromising and unforgiving” - where future uncertainty means the need to keep funds for potential redundancies, office moves and close down funds is essential. On the other hand Trustees also have a duty to spend their funds on their charitable purpose and so need to be investing in service delivery and development.

So what levels are charities setting in their reserves policies? Common rules of thumb for free reserves levels used to be 6 – 9 months, 6 months or 3 months operating costs. The Charity Commission does not set reserves levels but rather its guidance states “Any target set by trustees for the level of reserves to be held should reflect the particular circumstances of the individual charity.” NCVO’s Civil Society Almanac found the average reserves held by service delivery-type charities were equivalent to an average of 8.3 months’ expenditure in 2011/12. My experience is that in recent years more charities are using up their reserves and some have had to close. I expect that average reserves levels will have fallen.

How funders treat reserves is also a balancing act.  Charities can be turned down for having reserves that are both too high (e.g. Lloyds Bank Foundation sets an upper limit of 12 months) and too low. Too few reserves make the charity a risky bet, which may not last the length of any grant and may indicate poor planning. Too high and the charity is playing it too safe, may not be fully using its funds to support its clients and may be less of a priority “They don’t need our money”.

So as a charity Trustee what do you do? Actively set and monitor reserves levels. Include reserves in your strategic and fundraising plans. And whether they might be too low or too high, be upfront in telling potential funders the reasons why.


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