Cara Turtington: Understanding charity reserves policies

24 Jan 2024 Expert insight

Saffery partner Cara Turtington provides guidance on understanding charity reserves policies...

This content has been supplied by a commercial partner.

Charities have long played a vital role in addressing societal needs, but the effectiveness of their impact is often closely tied to their financial stability. One key tool in ensuring a charity’s financial resilience is a well-executed reserves policy.

What is a charity reserves policy?

In the UK, crafting a robust charity reserves policy should not be viewed only as a compliance requirement; when done well, it can aid strategic planning and provide a number of key metrics that explain how an organisation plans to manage its financial resources to sustainably fulfil its mission.

A clear and robust reserves policy not only assures stakeholders of responsible financial stewardship, but also safeguards an organisation against unforeseen challenges. The complexity of the policy will not only be driven by the size of the organisation but should also consider the risks that the organisation faces and the diversity of its income streams.

Why are reserves important?

In June 2023, the Charity Commission issued the latest update to its guidance on reserves (CC19 – Charity Reserves: Building Resilience), which provides helpful tools to create a reserves policy. The guidance also acknowledges the diverse nature of charities and that a one-size-fits-all approach may not be suitable.

The updated guidance encourages charities to link their reserves policy to the risk management process, future budgets, and spending plans. While larger charities may have comprehensive strategic and operational plans, all charities are advised to develop simple plans and budgets.

In recent years, charities have increasingly questioned the strict definitions outlined in the Charities SORP. As financial planning becomes more intricate, organisations are looking beyond these traditional definitions and considering wider parameters. This includes evaluating the availability of cash and liquid reserves, alongside free reserves, to gain a holistic view of financial flexibility.

What should a charity reserves policy contain?

As mentioned above, the SORP outlines specific guidelines, especially for larger charities, requiring a clear explanation and review within the financial statements. However, this review is likely to be a snapshot of the more comprehensive review the charity includes within its own records. Each charity needs to identify why reserves are (or are not) needed and their target level of reserves. In order to comply with the SORP, the explanation within the financial statements should include:

  1. Total funds overview: Every charity, regardless of size, must state the total funds held at the end of the reporting period. This offers stakeholders a snapshot of the financial health of the organisation.
  2. Identification of restricted funds: All restricted funds will not be available for the general purposes of the charity. This transparency helps stakeholders understand the limitations on the charity’s use of its resources.
  3. Identification of designated funds: Material amounts designated or otherwise committed at the end of the reporting period need to be outlined. There also needs to be an indication of the likely timing of expenditure of any funds designated for future costs.
  4. Functional fixed assets: In cases where funds can only be realised by disposing of tangible fixed assets or programme-related investments, charities are required to disclose the amount of such funds as these could not be readily converted to cash without disrupting the current charitable activities.
  5. Reserves after adjustments: Charities should state the amount of reserves held at the end of the reporting period after making allowances for any restricted funds, designations, commitments, or the carrying amount of functional assets representing a commitment of reserves. This is the stated free reserves.
  6. Comparison with the reserves policy: There needs to be a comparison of the actual amount of free reserves with the charity’s desired level. If relevant, trustees are expected to explain the steps being taken to align the reserves with the identified appropriate level, considering the charity’s plans for the future.

How to set a target level of reserves?

There is no one, single way that every charity can use to arrive at the optimum level of reserves for their organisation. In setting the target, the trustees should consider the charity’s risk assessment alongside the current economic environment and their plans for the future. A target range may be more appropriate for many charities rather than a single figure. This gives some flexibility to trustees; recognising that it might be difficult to accurately predict the timing of donation income and monitoring the ability of the charity to stay within a sensible range over time will give a clear indication of sound financial management.

In setting a target level of reserves, trustees should take into account, among other things, the following considerations:

  • The nature of the charity’s income including predictability of timing, regularity of receipts and whether it is contractual or voluntary in nature.
  • The future planned expenditure of the charity – expected future costs rather than historic actual expenditure will allow the charity to move forward with confidence.
  • What risks are identified that may impact the financial stability of the charity.
  • Are there any longer-term significant costs on the horizon?

The Charity Commission recognises that a zero-level reserves policy might be acceptable, but trustees must provide a clear explanation of why such a policy has been adopted, linking it to a thorough risk assessment. This may be the case for charities with a significant expendable endowment but even then, the charity needs to consider the liquidity of these funds.

Reserves policies of the top 100 charities in the UK

Among the largest charities, a number are now challenging the SORP definition of free reserves. Some identify a number of reserves that they consider to be free while others look to focus on liquidity or cash-based targets.

In addition, it was noted that over a quarter of these charities opt not to disclose a specific target level of free reserves in their financial accounts.

Furthermore, a closer examination reveals that approximately one-third of the largest charities take a more nuanced approach by disclosing a target range of reserves rather than a singular figure. This strategy, arguably more sensible, provides a level of flexibility in navigating the intricacies of running a charity.

Looking at the financial trajectories of the top 100 charities based on their last three sets of published accounts reveals an interesting trend. Over 70 of these leading charities have experienced consistent year-on-year increases in their actual reserves. This demonstrates that even as the inflationary pressures begin to bite, many charities are continuing to report surpluses in absolute terms.

However, fewer charities have increased their targets over the same period; 22 have maintained identical reserve targets in the last two reporting periods. This observation raises questions – does it show that there is less concern over rising costs, or does it hint at the possibility that these targets are framed in a broader context, with financial risks addressed in other areas of their strategic approach?

Despite the overall positive trajectory in actual reserves, around one-third of these charities were below their established target or range in the most recent set of published accounts. This is up from around a quarter of the same charities facing a similar situation in the preceding year. This growing difference between actual reserves and targeted levels for some charities prompts reflection on whether the external financial climate is starting to have an effect, and to consider how this will impact smaller charities who find it more difficult to sustain an underlying level of reserves.

Final thoughts

The charity sector is diverse and evolving and it appears that a simple definition of free reserves is not felt to be suitable for all charities. A more nuanced approach may help larger charities communicate the complexities of their operations. That said, it is also clear that some guidance and clarity is important in a sector where the vast majority of registered charities would be classified as small. Charities need to demonstrate their financial resilience; a well-thought-out reserves policy is a good starting point, and a way of communicating this to supporters and funders.

Cara Turtington is a partner at Saffery

Charity Finance wishes to thank Saffery for its support with this article 

The Charity Finance Yearbook is the ultimate reference source for charity finance professionals. Produced by the Charity Finance editorial and research team it includes updates, advice and trends on accounting and audit, VAT and taxation, investment strategy, responsible investment and finance, risk, funding, performance and governance, law and regulation, HR and pensions, IT and property. Purchase online here.


More on