Are your charity’s reserves too high? Are your reserves stopping you from getting grants? From time to time, charities have asked me if their reserves are too high, and one charity recently told me that they had been turned down by a funder on the basis that their reserves were too high. This is what prompted me to look at what funders say about charity reserves.
What are reserves?
This is the definition in the Charity Commission’s guidance (CC19):
Reserves are that part of a charity’s unrestricted funds that is freely available to spend on any of the charity’s purposes.
Reserves exclude funds which have been given for a specific purpose (restricted funds), e.g. to buy a minibus or to fund a specific salary or project. Reserves would also normally exclude fixed assets which the charity is using, such as a building or vehicle.
What are designated reserves?
Designated reserves are unrestricted reserves which the trustees have decided to earmark for a specific purpose. For example, if a charity knows it will need to replace its boiler next year and this will cost £12,000, this amount may be designated for that purpose. This should be explained in the reserves policy in the annual accounts.
Some grant-makers will regard designated reserves as separate from unrestricted reserves, others will not.
3 months’ running costs
I’m not sure if the Charity Commission ever recommended that unrestricted reserves should be the equivalent of 3 months’ running costs, but the idea that this is a standard amount still seems to be common. This is reflected in the reserves policies of many charities. Here’s an example I found in one charity’s accounts:
The Trustees aim to maintain free reserves in unrestricted funds at a level which equates to approximately three months of unrestricted charitable expenditure. The Trustees consider that this level will provide sufficient funds to respond to applications for grants and ensure that support and governance costs are covered.
Trustees should decide the right level of reserves for their charity, taking into account the need to maintain services if there were a drop in income; and the costs of unplanned closure. This should be explained in the reserves policy in the accounts.
What do funders say about reserves?
I looked at ten major grant-making bodies, which between them give around £275m per a year, to see what guidance they give to applicants about reserves. Reserves equivalent to up to a year’s expenditure are regarded as acceptable by half of the funders:
- Henry Smith Charity
- Garfield Weston Foundation
- Masonic Charitable Foundation
- Lloyds Bank Foundation
- Comic Relief
Funders do not wish to make grants to organisations that they judge to have sufficient funds to pay for the work themselves. Garfield Weston Foundation:
Organisations with liquid reserves (net current assets plus investments) covering more than 12 months’ expenditure are unlikely to receive a grant unless they can make an exceptionally convincing case that they are in financial need.
Rayne Foundation and Trust for London state that they are unlikely to support applications where organisations have unrestricted reserves over nine months’ expenditure. Both funders regard over nine months’ expenditure as “significant reserves” and consider that organisations with this level of reserves are less in need of funding.
Trusthouse Charitable Foundation and People’s Health Trust set the bar even lower at six months, although Trusthouse does offer applicants the opportunity to explain why their reserves are higher.
If your accounts show that you have more than 6 months’ unrestricted reserves, your application is unlikely to be treated as a priority unless you explain the need for holding reserves at such a relatively high level. You might, for example, be fundraising towards a large capital project.
Are your charity’s reserves too low?
If your charity’s reserves are low this can adversely affect your chances of getting grants. Grant-makers want to fund organisations that are well-run, and likely to continue to exist, at least for the duration of the grant. Most do not want to fund organisations that are in crisis, as there is a risk that their grant could end up being used to meet the costs of closure rather than to deliver charitable purposes.
Trust for London states that is unlikely to support organisations that are in serious financial deficit. Rayne Foundation states:
Organisations with tiny reserves or an overall deficit will need to convince us that their organisation is viable and they are taking action to increase reserves.
In conclusion: be able to explain your charity’s reserves policy
The vast majority of grant-makers do not have stated policy on reserves, but the level of reserves a charity holds is still likely to be one of the factors they consider when making a decision whether to fund a charity or not. It makes sense to know about your charity’s reserves and to be able to explain them. And this is especially important if reserves are significantly higher or lower than the required level stated in the reserves policy.
City Bridge Trust:
We do not apply rigid criteria on what constitutes a reasonable level of unrestricted reserves. Applicants must justify their level of free unrestricted reserves in relation to their stated reserves policy and their obligations as set out in accordance with guidance issued by the Charity Commission or other regulatory body.
To be able to explain your charity’s reserves, firstly find out the amount of unrestricted reserves in your charity’s last published accounts and work out how many months’ expenditure this equates to. Then read the reserves policy in the accounts. If unrestricted reserves are higher or lower than the level stated in the reserves policy find out why. If there are designated funds, find out what they are earmarked for, and when they will be spent. The Treasurer should be able to explain all of this. If these points are not adequately covered in the reserves policy write a statement explaining them. Include this statement in funding applications when relevant.
If you remember the figures and the reasoning behind them you will be ready to explain your charity’s reserves if you get a query from a funder.
Have you got any questions about reserves? Add them in the comments below and I will reply.