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Adequate Reserves lead to a Resilient Organisation

The pandemic and the cost of living crisis, not to mention supply shortages, the energy crunch and the high cost of food will engender significant budgetary crises in our organisations.

I spoke about the necessity for all organisations to review their 22/23 and 23/24 budgets for the devastating effects of inflation.

This must be done by the end of September 2022!

But what about our reserves? The higher the levels of reserves we hold the better we are able to cope with resilience challenges.

Usually reserves are designated as say 6 months of the net expenditure of the organisation. This does not reflect the the levels of risk the organisation faces and is sometimes a somewhat lazy way of estimating what levels of reserves are required by us.

To develop a standardised way of completing a reserves policy we need to:

  1. Manage financial risks like falls in real income and unexpected rises in real costs.

  2. Reductions in working capital and the consequences of capital investment approaches

  3. Ensuring reserve strategies are forward looking and don't just rely on backward published accounts.

  4. Ensure that forward business plans are utilised in formulating reserve policies.

  5. Consider how future unavoidable costs might change.

  6. Determine a range of reserves ranging from best case to worst case risk scenarios.

  7. Point 6 may translate into short term and ling term reserve positions depending on the circumstances we face.

Organisations with healthy reserves are better equipped to deal with resilience challenges. We need to be able to respond to shocks and challenges in a speedy and afaptive way.

Is a reserves policy really a resilience policy for your organisation ?

There is a temptation to just set reserves as some percentage of current or future net expenditure but that won't take account of the risks and challenges your organisation faces.

The policy needs to be matched to the risks defined in your risk register and by doing this you will make your organisation more resilient.

How can we do this?

The following components form the basis of a resilient reserves policy:

  1. Counting debtors that you might not collect

  2. Estimating funding you might not receive

  3. Adjusting your income and expenditure budgets for inflation that you did not expect.

  4. Including cash flow deficits you didn't budget for.

  5. Budgeting for the likely effects of supply shortages and higher energy costs.

  6. Taking account of climate change pressures.

These are some of the most important elements of a risk based reserves policy that will Increase your organisational resilience.

So please no more percentages of current or future spend as the markers of your reserves strategy.

You must quantify the risks you face and build your reserves strategy accordingly.

A reserves policy must take account of the risks your organisation faces.

Does that make sense?

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