A Charity Commission analysis of 286 trustees’ annual reports has revealed that almost four in five charities now have a reserves policy – a marked improvement on a similar survey conducted in 2006, when only two in five charities had one.

The recent review examined the trustees’ annual reports of around 95 charities in each of three income brackets - £25,000 to £250,000; £250,000 to £500,000, and over £500,000. It found that 78 per cent contained a reserves policy statement, and a further 3 per cent stated that the trustees have no reserves policy.

However, larger charities were much more likely to include a reserves policy statement – 91 per cent of the organisations in the top income bracket did have one, compared with 59 per cent of the smaller charities. This is despite evidence that smaller charities hold proportionately more reserves than big ones – the average reserves-to-income ratio of the smallest income was 3.49:1, while the largest charities’ average ratio was 0.42:1.

According to the Charity Commission, some charities also overstate their reserves. In the report accompanying the findings, the regulator stated: “This doesn’t appear to be intentional but rather due to a lack of understanding around the definition of reserves, as the figure quoted is often the same as the total funds figure from the balance sheet.” However, where charities have designated funds, the quality of reporting improves.

More to be done to ensure compliance

Despite the improvement in compliance compared with six years ago, the Commission said the sector still has a way to go to abide fully by the law, as all registered charities apart from exempt or excepted ones are legally required to either include a reserves policy on their trustees’ annual report, or state that they don’t have one.

“The research also shows there is still a lot more finance managers and trustees can do to improve how they present the charity’s reserves policy in the report. It is not enough just to simply say they have one,” the Commission said.

It is important that charities have a reserves policy and publicly explain it, according to the Commission, because charity law requires any income received by a charity to be spent within a reasonable period. “Therefore trustees need to be able to justify the level of reserves they hold and be transparent and accountable about their approach to their stakeholders.

“Another reason is that a good policy gives confidence that the charity is managing its finances well and planning its future funding needs, which may be of interest to potential donors.”