The right level of charity reserves is an important debate and pertinent for the beginning of 2021 for obvious reasons.
Our 2020 Benchmarking study asked respondents how many months’ running costs they had in reserve*. The average number of months was 5.5.
I wonder what the figure will be for the end of 2020 and again at the end of 2021?
*please note, these were pre-pandemic figures and that most respondents were charities with an annual turnover of £1m plus
It is best practice for charities to maintain a level of reserve, sufficient to cover themselves in the face of unforeseen events and also to enable them to be able to cover the costs of winding up should the worst happen and the charity need to close.
The Charity Commission has always recommended a reserve of between three and six months’ running costs, though many charities I have worked with either have, or are aiming to have closer to 12 months running costs in reserve.
The pandemic has been a sore reminder of the need for reserves for ‘unforeseen events’ and will no doubt encourage trustee boards (if they haven’t already) to reassess their reserves policy and to decide whether or not it is adequate.
On the flip side, having high amounts of reserves could be viewed as ‘excessive’ unless you have an adequate explanation for them. To be seen to be ‘hoarding’ cash when you could be spending it on helping more people / fulfilling your charitable purpose will not do your reputation any good and will make it difficult for you to raise additional income.
‘Donors will be put off’
Knowing the sweet spot between too much and too little in reserve and being able to articulate it, is a core skill for both trusts and major gifts fundraisers.
Far too often, we assume that a high level of reserves will seriously inhibit our chances of securing funding.
In my experience, this is NOT been the case. The opposite in fact.
In 2017, I worked with a small heritage charity that had more reserves than most would consider adequate. They turned over around £100,000 each year and a couple of years prior to working with them, received a legacy for £1.2 MILLION. At the time of working together, rather than the recommended 3-6 months’ running costs in reserve, they have something like 69 months in the bank.
They wanted support to find match funding for a large capital project they were planning to deliver in partnership with another organisation.
Many fundraisers would assume that fundraising would be impossible in these circumstances (why not just use your reserves?), but that was not our experience and we secured £200,000 over 6 months towards the project.
Here are some of the factors which I believe played a part:
There was a plan in place
The charity had a plan for their reserves and explained this plan very clearly in their annual report.
We helped them to hone and refine this message to make their plan even clearer for the purposes of funding applications (good fundraisers should be brilliant at playing Devil’s Advocate and for asking ALL the tricky questions before a funder will).
The project was 92% funded
Of course, some charitable trusts are limited in being able to support charities with a perceived high level of reserve (though I think this will change in the future and that more trusts will want more evidence of a charity’s ability to sustain itself through hard times than has previously been asked).
This particular project was 92% funded and we were asking trusts, foundations and wealthy individuals for that final piece of the pie.
Clearly, the desire for their gift to make an impact, and to have a stake in a local project (which for many was well known and much loved), was greater than their desire to question the charity’s reserves level.
Embrace the power of the finish line and of projects with ample match funding. Hatch, match, dispatch…
It is better to have too much in reserve than too little
Following a year where so many incredible organisations have crashed and burned, it is clear now that (maybe) the landscape is shifting and there is more understanding of the need for charities to hold a higher level of reserves than what was previously deemed acceptable.
Two of my hospice clients are very serious about having 12 months running costs in reserve at all times. Whilst they don’t necessarily hit this goal each year, they feel that this target is appropriate as the idea of not being available for their local community is unthinkable.
One of these clients has started to make plans to grow an endowment so that in years to come, they can reduce their reliance on more traditional, short term forms of income.
Don’t assume that trusts won’t fund you
We didn’t assume. And they did fund us.
How are your reserves looking right now? Does your income generation plan support the growth of your rainy day funds?
Email us today email@example.com for a chat about how we can help you to grow your income for the long term.