Charities - why reserves matter

Charity governance can be complex. One of the greatest challenges faced by trustees relates to financial reserves and investments. These are often points relegated to the bottom of the agenda after crucial areas like overall strategy, staffing and grant-making have been tackled. Unless there are investment professionals represented on the board of Trustees it’s often difficult to have a meaningful discussion about these topics. From a big picture perspective, two simple concepts can bring tremendous clarity.

First, know why your charity holds reserves. This sounds simplistic, but in a media environment where charities can find themselves criticised for having too little, or too much reserves, a clear idea of the purpose of the reserves can bring peace of mind. Primarily, charities hold reserves for one reason – to ensure that future charitable expenditure objectives can be met. One of the primary responsibilities for any charity trustee is to balance the needs of current and future beneficiaries and reserves can be a powerful tool to do so.

Secondly, consider investing reserves to achieve improved longer term returns. I’m often asked if it’s appropriate to invest charitable reserves. The short answer is yes, reserves can and often should be invested, but a few factors need to be considered first. Whilst reserves are often expressed as a range or multiple of months, the absolute level of reserves often dictate investment options. Smaller sums are often simply kept in an interest bearing account. For larger sums, it may be relevant to divide funds between those required to cover short and long term contingencies.

In my own experience, trustees are usually conservative and at times overly cautious. There is a perception that charity investments should be very low risk, when in reality charitable objectives can be greatly enhanced by additional, longer term returns achieved via market investments. The often perpetual time horizon of charities makes it particularly important to protect the real value of investments by aiming for returns above inflation.