Reserves

What are reserves?

Reserves are that part of a charity's income funds that is freely available for its general purposes
Reserves are NOT: permanent endowments; expendable endowments; restricted funds; designated funds; and income funds which could only be realised by disposing of fixed assets held for charity use.

Why hold reserves?

Organisations that deliver services, employs staff, rent premises, purchases goods or services must ensure that they have sufficient resources.
There is always an element of uncertainty or risk.
It is good practice for organisations to seek to build some financial reserves that will allow them to meet future commitment or unforeseen expenses without a negative impact on their ability to deliver their services or develop their businesses in the manner planned.

What should treasures do?

  • Ensure a reserves policy is formally agreed
  • Understand and formally agree the principles behind their charity's reserves policy
  • Set a level of reserves which is the thought through rather than an arbitrary figure or rule;
  • Put in place realistic plans for keeping the charity's reserves at the level or within the range set out in the policy.
  • Consider risk and what action that can be taken where the charity's reserves are below the level needed to run the organisation effectively.
  • Reserves policies
  • Give the reason why the charity needs reserves
  • Say what level (or range) of reserves the trustees believe the charity needs
  • Say what steps the charity is going to take to establish or maintain reserves at the agreed level (or range)
  • Set arrangements for monitoring and reviewing the policy.

What can reserves cover?

  • Reserves to absorb setbacks and emergencies;
  • Reserves for regular, short-term fluctuations, say to bridge cash flow problems;
  • Reserves to help plan for growth;
  • Reserves for specific future projects.


Assessing the level of reserves

  • How secure is the present funding?
  • How reliable are future income plans?
  • How long would it take to find alternative sources of funding?
  • What are the prospects for finding new funding sources?
  • What are the future spending plans including significant capital expenditure or new initiatives planned?
  • What is the future needs, opportunities, contingencies or risks?
  • What risk and opportunities might arise which could not be met out of income such as staff sickness, maternity leave, staff leaving and recruitment costs and the security of your property lease?
  • Ask what if€ questions for example if individual income or expenditure streams rose or fell by for example 5%, 10% etc.
  • How good is the charity's Cashflow?
  • External risks facing the charity need to be taken into account.
  • Are there are needs for certain funds to be designated for certain purposes or if some can be released to establish the suitable level of free reserves the charity needs.
  • If the charity had to close, how long would it take to transfer clients to other organisations and wind up in an orderly manner causing least hardship to users?
  • What might the additional costs of closure be, such as redundancy costs, legal and accountancy costs, and time to expiry of leases on property and office equipment?

Myths

  • We have funds to keep as reserves
  • But we wont get funding if we have reserves
  • Its impossible for us to build up reserves

Reporting

Paragraph 55(a) of SORP 2005 requires trustees to include in their Annual Report information about their charity's reserves policy and the level of reserves held. In particular, trustees should:

  • Describe their charity's reserves policy;
  • Explain why they hold or do not hold reserves;
  • Give the level of reserves at the last day of the financial year to which the report relates.

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Providing high quality, accessible, low cost services.
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