Sector Focus: Have faith in the right reserves policy

02 Mar 2020 Expert insight

Adam Halsey looks at reserves policies from a faith charity perspective.

Sitting in a Church of England Diocesan meeting when the budget for the year was being considered I heard the question: “How can we possibly need to reduce the number of clergy we have when we are sitting on millions of pounds on the balance sheet?” The reply? Pensions black hole; parish generosity stretched too far; expensive property to maintain; uncertain economic climate. This showed me that more is needed to help the people better understand the charity’s financial picture.

The concept of a reserves policy is now almost 20 years old, and all charities dutifully report on it in their trustees’ annual report and accounts. Guidance from the Charity Commission (CC19) stresses that any policy on reserves must be risk based and funds retained must be justified. However, since the 2000 Charities SORP first introduced the concept of a reserves policy and provided some guidelines as to how one might be formulated (ie three to 24 months unrestricted expenditure), most trustees have realised that an expenditure-based model is appropriate for some, but not for others. Trustees, including those operating in the faith sector, are now trying to grapple with conflicting views on adequate versus excessive levels of reserves.

Although the faith sector is very diverse and you can argue that any generalisations I make might not be relevant to you, the point of this article is that medium to long-term business and financial planning is needed by all charities, big and small, to determine what policy for reserves is appropriate.

Risk-based policy setting 

The risk-based reserves policy is predicated on the fact that no-one can predict the future with any degree of accuracy, and as such an assessment of what could differ to that planned is critical. It’s all about the “so, what if?” approach. What if we have a recession; what if the stock market crashes; what if statutory funding dries up; or what if we need to buy/sell/refurbish a property? Brainstorming the “what ifs” enables you to put a number on it – a number that represents the loss of money over the period it takes you to realign the business back to equilibrium.

Predicting the future

For many faith charities, the past and current uncertainties are challenging trustees and management. How can we possibly plan for the unknown? The answer is that you have to, but try not to strive for precision. Just show that full thought has been put into your plans.

Also, show that you have learned from the past. Most charities have been around for more years than the SORP has, and so there have been learnings from the past that can help. Invariably most will say “it wasn’t as bad as we thought it could have been”, but to me that is down to adopting the prudence concept which the Charity Commission stresses is so important in demonstrating financial resilience.

Be practical

Don’t spend all of your time worrying about getting your policy right. Most faith-based charities should consider:

  • What are your current and future planned unrestricted deficits? – remember that bridging the gap using fundraising or cutting costs is never easy
  • Key planned projects that have not entirely been fundraised – this could be lead time in between buying or selling properties or major works on places of worship which invariably cost more, take longer than planned and contain much red tape
  • Reliance on legacy and major donor income which can be unpredictable
  • Cost of opening or closing a significant project
  • Worse case scenarios for a change in taxation/government policy/economic shift

Build up your policy

Use this information to build a spreadsheet which calculates a range of reserves that you may need. Think as well about the cash. Timing of cashflows can be the biggest unknowns in the case of major project spend and legacy income. A legacy debtor definitely does not help cashflows but a retention creditor does!

Think of the audience

There is never a right answer but using a very outdated, say three to six months of unrestricted expenditure, basis for a policy will not fit with your risks in most cases. Take time to think your policy through, as those that are reviewing your accounts (funders, stakeholders, staff, contractors, commissioners) need help understanding your balance sheet and this is a very useful tool! This ought to ally to designated, restricted and endowed reserves as these are important to understand your financial challenges. 

Adam Halsey is head of faith charities at haysmacintyre

This content has been supplied by a commercial partner. haysmacintyre sponsors the Sector Focus series.


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