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Neil Poynton: A strategic approach to deploying charity reserves

27 Jul 2021 Expert insight

Neil Poynton from the Charities Aid Foundation offers some advice on how to use reserves in the short, medium and long term

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It is estimated that £17.9bn is the amount of un-invested cash held by UK charities, according to Charity Financials Banking Spotlight 2020, a Charity Financials report based on the top 5,000 UK charities according to certain income criteria.

There’s no denying that the past year and a half has been extremely challenging financially for many charities. For some, reserves have been utilised to adapt to meeting an ever-growing demand for their services and against the backdrop of reduced fundraising and alternative income streams. Others have found the need to use reserves simply to cover working capital requirements.  

The demand placed on charities is set to continue into the foreseeable future, leading to pressure on charities’ reserves. This is why it’s an important time to consider reassessing your approach and adopt a strategy to best deploy your charity’s hard-earned funds in the short, medium and long term. 

CAF’s Charity Landscape Report from December 2020 found that 43% of charities already intend to make more of their reserves over the next 12 months. So where can you start when making the most of your charity reserves?

The Larder/Fridge/Freezer approach

One useful approach to managing reserve funds is the Larder/Fridge/Freezer strategy – a way of structuring your funds by timeframe in order to “sweat the assets” and ultimately achieve your financial goals. The larder addresses the needs of the charity in the short term, as we do as individuals: paying regular bills, short term projects or contingency funds for the “what ifs”. The fridge aims to get a little more from your money but can be accessed relatively quickly if needed – albeit with a possible breakage penalty. The freezer is more about risk and return and “investing” for the long-term goal. 

When managing charity finances, it’s important to constantly review the situation in your larder, fridge, and freezer, considering each element together rather than individually. If you concentrate on the larder but ignore the fridge, then the strategy is unlikely to make the most of your reserves. 

The Larder: Day-to-day operations

The larder represents your day-to-day operations; ensuring you have a suitable cash flow and reviewing your daily and monthly transactions with current access to your accounts. It is worth considering what your charity needs and day-to-day when looking for  a banking partner, be that access practicalities such as telephone or online banking, or even ethical considerations. 

The Fridge: better returns – suitable access

The fridge is designed to get a better rate of return on your funds, while also managing the risks. This can generate income and enable you to set aside funds for specific projects with fixed-term and notice accounts. What is best for your charity? Is it, is access, interest rates, protections, credit rating and regular reviews.  

The Freezer: working harder for better returns

The freezer is all about long-term planning to ensure your future. These assets need to be robust with well-thought-out choices that will resonate with your supporters and beneficiaries. It’s about making the most of your long-term funds and generating better return on your investments that you can build on in the future. Things that need consideration include risk, reward, asset allocation, fund management and ethical considerations. Align your investments with your mission and think about what your supporters, donors and beneficiaries expect from you.

Unlike the provisions placed in the larder or fridge, your freezer assets require a far greater degree of skill and knowledge to get right. Is this something that you can do alone, or will you need help? Your freezer assets need reviewing regularly and this takes commitment and time.

When investing, it is important to be clear about what you do, how you intend to do it and what are the deliverable timescales. You may be familiar with Self-Managed Portfolio and Discretionary Management Services, but you will need to give serious consideration to whether you require advice to achieve your long-term reserve deployment strategy.

It is likely to cost but it could be money well spent.

Considerations for Deploying your Reserves

If planning how to deploy your charity reserves, it is important to know and act within your charity’s powers to invest and select the investments that are the right fit for your charity. This means:

  •  Assessing the suitability of investment
  • Considering diversification options
  • Seeking professional advice, unless you have valid reason for not doing so
  • Ensuring there is a balance between risk and return
  • Reviewing your investments regularly
  • Creating or updating your investment policy
  • Considering an ethical or socially responsible approach

Neil Poynton is head of charities financial services transformation at the Charities Aid Foundation. There is more information on planning your charity’s investments in CAF’s investment knowledge centre which has articles on writing an investment policy, picking the right investment approach and considering ethical investments. For those new to investments, CAF has created a guide on getting started with investments. Different investments suit different investors, so it’s important to get advice from an independent financial adviser. CAF has more information about investment advice for charities here.

Legal disclaimer
CAF Financial Solutions Limited (CFSL) is authorised and regulated by the Financial Conduct Authority under registration number 189450. CFSL Registered office is 25 Kings Hill Avenue, Kings Hill, West Malling, Kent ME19 4TA. Registered in England and Wales under number 2771873. CFSL is a subsidiary of Charities Aid Foundation (registered charity number 268369).

 

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