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Charitable reserves: A case of glass half-empty?

by Sam Pinder

07-03-2016

With the high-profile demise of ‘Kids Company’, the issue of how trustees govern charities has been brought into sharp focus. In light of this, the Charity Commission has issued updated guidance for trustees seeking to comply with their responsibilities in terms of financial management, in particular the need for a financial reserves policy.

In terms of Kids Company, a report published by House of Commons Public Administration and Constitutional Affairs Committee (PACAC) at the beginning of February lay the blame firmly at the feet of the charity’s trustees.

Such high profile, fundamental failings provide a valuable lesson for all involved in the management of charities. The trustees had failed to heed consistent warnings from auditors regarding the charity’s precarious financial position, which was incapable of surviving any variance in its funding stream.

In PACAC’s report, Kids Company’s ‘demand-led’ model, where children could self-refer to the charity and be protected by the idea that no child should be turned away, raised the need for bespoke consideration as to what constitutes sufficient reserve levels.

In light of the Charity’s size, the report suggests that six months spending (approximately £12 million) would have been appropriate. In 2013, the £424,282 held in reserve constituted approximately 6% of the recommended amount.

The vulnerability of a charity the size of Kids Company, whose income was £23.1 million in their last financial figures, highlights the need for more specific financial advice for the trustees who manage charities on a much smaller scale. For instance, the Charity Commission’s December 2015 figures state that nearly three-quarters of charities have an annual income of less than £100,000.

It is somewhat convenient that the Charity Commission updated their guidelines on these matters at the end of January, three days prior to PACAC’s report. In Charity reserves: building resilience (CC19), it was confirmed that there is no ‘one size fits all’ approach. In fact there is ‘no single level or even a range of reserves that is right for all charities’.  The guidance advises trustees to continuously review both their reserves policy and the level of reserves.

Of particular assistance are the annexes in CC19 which detail a step-by-step approach to developing a reserves policy both in terms of simple charitable organisations and those which are more complex. Underlying a competent policy are provisions that fully justify the extent of financial reserves, ensuring that the essential requirements of beneficiaries are protected and plans are put in place for unforeseen liabilities and financial difficulties.

There are approximately 580,000 trustees of charitable organisations in the UK and this advice provides some welcome clarity, certainly considering that it is thought that the vast majority of trustees are volunteers, with little management experience.

Yet significantly, the need for financial reserves is still up for debate. CC19 recognises the importance of having a policy, if not necessarily the financial reserves itself. This is a question left to the trustees of each charity, operating in a challenging environment and balancing the need to ensure that as many funds as possible are distributed to beneficiaries whilst ensuring that those same individuals still benefit where there are darker days in the future.


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