Insights

Reserves

  • Written By: Nick Murphy
  • Published: Mon, 15 Oct 2018 13:47 GMT

Lauren Weymouth: We found in our survey that 30% of charities have fewer than six months’ expenditure held in reserves which doesn’t seem very much. Is this something we should be concerned about?

Reserves

Nick Murphy: Six months just doesn’t feel sufficient. It must be very hard to make strategic planning decisions if you’re living so hand to mouth.

Malcolm Munro-Faure: I think it depends on the charity’s overall strategy. At The Royal Star & Garter Homes, we designate all of our assets to specific purposes. And then we set aside 12 months for reserves. This is because we provide care for life and that’s an expensive thing to do. About half our money comes from fundraising. If that revenue were to collapse, we’d need a reasonable amount of money to restructure our organisation.

We also need to react to changing circumstances. If we were to find ourselves in a position where the government’s approach to social care white paper significantly affects our income, then we would have to make changes to enable us to continue providing high quality care. This has made us a little more cautious when it comes to calculating the amount of reserves we should hold.

Susan Wood: I think each charity’s reserves policy is different depending on the kind of charity it is. The vast majority of our clients have endowments — reserves aren’t so relevant to them, because they don’t rely on fundraising.

I wonder how people would have answered this question a couple of years ago. I say that because right now we are dealing with distorted markets. Your return on cash is zero, so there’s a cost to holding reserves. And as inflation picks up, that’s the part of your portfolio that is going to be most eroded. Of course, you have to be prudent, but you do have to look at the cost.

Lauren Weymouth: Do you think the reality is different from the ideal? Do you think a lot of charities, including your own, would like to hold more in reserves?

We do quite alot of direct mail and the rules have changed in that area, making it significantly more challenging. This will affect a lot more charities.
Malcolm Munro-Faure, The Royal Star & Garter Homes

Andrew Wimble: What is your definition of reserves? In my role as a trustee, we don’t have them. We have a certain amount of cash that we can dip into at any one time. But if this income goes down, we’ll award fewer grants. I imagine this is the case with a lot of charities.

Susan Wood: And that is completely different to Malcolm’s challenge. At The Royal Star & Garter Homes and charities like it, they don’t award grants, they have long term obligations to provide care or other services.

Malcolm Munro-Faure: Yes, we work with long-term commitments — we might be looking after someone who lives for another 10 years and there can be no disruption to their care during that time. There are a lot of different charities and each charity will have its own specific requirements.

Lauren Weymouth: Moving on, let’s look at what respondents considered the most uncertain sources of income. 29% say annual fundraising activities. Do we think this is surprising?

Noga Confino: I’m surprised it’s not higher. And that’s not just because fundraising is naturally unpredictable, but because it depends on the public mood and what’s in fashion. As an environmental charity, the fundraising environment for us is very ‘moody’. People naturally gravitate toward helping human beings, so we experience highs and troughs on a regular basis.

Andrew Wimble: And then there’s your reputation. Oxfam’s revenues were severely hit because of the recent scandals. But this can create a ripple effect and other charities can find themselves guilty by association.

Malcolm Munro-Faure: There’s also the fact that fundraising is just very hard work and very hard to maintain. Some things are out of your control. We do quite a lot of direct mail and the rules have changed in that area, making it significantly more challenging. This will affect a lot of charities.

Grant Wilson: If we’re looking at more secure sources of income, there are professional societies that have big membership dues. And they don’t tend to be particularly flexible in economic downturns. The dues will get paid, with the cause and the economic situation of the patrons the main variables.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.

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