The failure of the charity Lifeline Project has renewed talk of whether charities need to keep more money aside. Kate Sayer, partner at Sayer Vincent, says that discussion on this subject often miss the point of reserves.
Whenever a charity fails, there are comments that the reserves were inadequate. Measures often relate the level of reserves to the income of the charity. But this is based on the false premise that reserve levels should be based on a formula, whereas the reserves policy should be based on the risks facing the charity.
We need to remember that reserves are unspent unrestricted income. Charity income is meant to be spent on the charity’s objects to benefit the charity’s beneficiaries. It is not intended that charities should hoard reserves for the charity to continue in perpetuity or to allow trustees to sleep better. In fact, there is a strong argument that high levels of reserves can lead to complacency and poor financial practices, such as allowing long credit terms to those who owe the charity money. Organisations that are short of cash are more likely to steward those funds carefully. That is not to say that charities should not hold reserves; charities should hold appropriate levels of reserves.
Risks that should not be managed by reserves
I often see charities using reserves to help them manage problems that have their root cause in the charity’s failure to manage some other aspect of risk.
If a charity must close, then it has not successfully managed its risks. While it has opportunities to improve the position, it should seek to do so. If the trustees see early warning signs of problems, then they should consider merger at an early stage, rather than hope that ‘something will turn up’. So this is not a signal to trustees that they should not consider financial sustainability – it is an existential risk that should be on every charity’s strategic risk register. But it should be framed in positive terms – ‘what can the charity do to improve financial sustainability?
From Civil Society Voices. Read the full article