The importance of cash reserves

12 August 2015

It's never been more top of mind than now for charities to recognise the importance of holding sufficient cash reserves. And we're not just talking of an amount necessary for a rainy day. Cash reserves if administered effectively should be a key tool in your accounting armoury and in our view, a vital aspect of a charity's good governance.

However, some charities may take the view that because of the nature of their size, aims and operational methods, it would be wrong to hold any reserves. Others see the need for a reserves policy as a practical and moral imperative.

At GSM we are firmly on the side of the latter and we constantly review our charity clients position, vis a vis restricted and unrestricted funds, to ensure that the reserves policy continues to be relevant as the charity develops or changes its strategy and activities.This might be just the right time to review yours?

And where there is simply a reluctance to retain a reserve, it's our experience that often there is a fear factor that perpetuates of a charity holding cash: One, the perception of the outside world - as to any negative press that might accrue as a result of holding cash reserves; and two, the discord that might occur between Trustees' discomfort in having their names associated with a charity that holds on to cash and those who may well perceive that not spending income will not be in accordance with the aims, ambitions and the operational activities of the charity.

At GSM we aim to clarify that often mistaken interpretation: It is precisely those ambitions that will be under threat, as we've all recently seen, if cash reserves aren't available to meet operational commitments. By formulating a legitimate reserves policy, charities can make it clear that such reserves are for future needs, rather than hoarding cash unnecessarily.

In establishing a reserves policy, it is often the relationship between undertaking the charity's core purpose and the time required for income to be regenerated, should it fall below an acceptable level, adjudged from past experience, that determines the length of time cash in reserve should represent, e.g. 5 to 6 months of general spending. And so if there is this amount in reserve, the charity is well positioned to be able to keep up expenditure, should there be any prolonged period of a shortfall in income.

Of course there are worse case scenarios that can be planned for too. With a cash reserve in place, beneficiaries of a charities' work can be provided with continuity of services. If a charity were to fold, for example, service users may need to be transferred to another charity's facilities and staff compensated, so time should be allowed, e.g. an additional 12 weeks, to wind down in a responsible fashion. So we help to financially plan for that too.

At the heart of every successful reserves policy is that it always pays to keep an eye on the relationship between reserves and income. At GSM we are that third eye for all those in the third sector.

For more information and to arrange a meeting to hear how GSM can provide the continuity that a responsible, forward thinking cash reserve policy can provide for your charity, contact us today.