The Charity Commission recently released a revised Charity Reserves guidance.
It is entitled Charity Reserves – Building Resilience (Hereafter CC19), and, as the name suggests, it is reflective of the criticism that some charities have faced this past summer in terms of financial security.
There are a few important changes in the CC19 that deserve some attention and, I believe, some dispute.
But before we explore the changes, we have to acknowledge the debate that surrounds this subject. It is safe to say that there is no consensus when it comes to reserves, many feel that charities are not financially secure enough without high levels of reserves while others believe that the sector is limiting its potential impact by holding too much income in reserves.
It is important to bear it in mind the context in which the CC19 has been realised. Especially because, through this guidance, the Charity Commission clearly takes a side in this debate.
The biggest change in CC19 is the new focus on unplanned closures, a subject previously unmentioned in any of its predecessors. Importantly, the notion hasn’t simply been added to the list of considerations for trustees, it has instead replaced the general trust law principle that states income should be spent within a reasonable period of receipt.
Although the general trust law principle still features in the guidance, it is after all charity law, it has been demoted from the ‘Key points’ section, to the ‘Other questions’ section.
This replacement seems to indicate the Charity Commission’s shift away from its default position on income: that it should be spent not saved.
Adding unforeseen closure into the mix of elements that trustees must consider when formulating a reserves policy is a significant change that, if followed, will have major impacts on the size of reserves that the sector holds.
The updated CC19 encourages trustees to estimate closure costs and formulate a reserves policy that reflects these estimates. Reserves policies and closure plans are being merged into one in a way that arguably neglects the underlining purpose of a reserves policy: managing short-term shortages in income (Vincent, 2016).
The important point to make here is that reserves are not responsible for the long-term sustainability and resilience of a charity, this is instead dependent on an organisation’s business model and service delivery, not an overextended reserves policy.
This expansion of the purpose of reserves appears to be a hasty judgement after last summer’s events at Kids Company and will likely increase the level of reserves the sector holds.
I believe it is misplaced to include closure plans into reserves, as by definition reserves exclude the role that fixed assets would inevitably play in the event of a closure.
But more than that, in presenting reserves as the only viable option for financial security and resilience, the CC19 is failing to acknowledge alternative strategies to ensure access to cash, viable financials, and adequate capacity.
Having a high reserves is the most conservative way of achieving this, but it is not the only way. Setting a reserves policy, and keeping to it, is very necessary for many charities’ stability.
However if this translates into more charities having ever higher levels of reserves, then the sector may be creating another hostage to fortune for the media and more importantly donors, which undermines trust.