Linking Risks to Charity Reserves

I want to talk about reserves in this blog and how they can link to charity risks.

Every charity has a policy on reserves and what they should cover.

This is not covered in public sector organisations which don't have a reserves policy although they do have reserves.

Many charities don't link reserves to risks the charity faces. If one looks at the accounts of many charities they say something like " our free reserves cover 6 months of spending".

This assumes that if there is an event or group of events that would force a charity to close and not take in any more funding, the charity could operate for a further 6 months using its free reserves.

Free reserves in terms of a charity are those which are not restricted for a particular purpose nor do they cover fixed assets nor are they designated for a specific purpose.

In general why would a charity or indeed other public benefit organisation hold reserves in the first place?

1.Cope with variations of income and expenditure

2. Invest in future projects or asset purchases

3. Meet additional costs

4. Improve cash flow

However we need to be better than this and relate our reserves policy to the risks identified in our risk register!

For each risk we need an allocated reserve to cover that risk or at least mitigate it.

This reserves policy would be more effective than just stating the number of months net spending that a charity would cover in certain circumstances.

Other organisations need a reserves policy as well as charities but there is little evidence they do this.

They need to estimate the level of future reserves and link them to the risks the organisation faces.

5his will be a better and more intelligent use of reserves!

We will opine more on this issue in future blogs as it might relate to local government and charity commission Guidance!

For now let's

1. Estimate future levels of free reserves

2. Match them to the future levels if risk we face.

Do we think this is a good way forward!