OPERATIONAL GUIDANCE

CHARITY INCOME RESERVES

Practical example of a reserves policy:
reserves may become an end in itself

OG 43 E11 - 24 May 2000

Divisional responsibility

For information:

Charity Support Division

Contents

1. Objects of charity
2. Approximated figures from SOFA
3. Stated policy
4. Comment

Meaning of expressions - list of Glossary terms used in this Guidance
Index to further related information

1. Objects of charity

To promote the knowledge and appreciation of the countries peoples and cultures etc of a particular continent.

2. Approximated figures from SOFA

£

Incoming resources

470 000

Resources expended

300 000

Net incoming resources

170 000

Fund balances carried forward to next year

415 000

This charity appears to have no restricted or designated funds.

3. Stated policy

########## is a young charity whose staff numbers and activities have grown very fast due to successful fundraising in the corporate sector. The trustees are persuaded that over the first two years of the life of the charity they have been entirely justified in authorising the build-up of a significant reserve to act as a cushion against any shortfall in revenue and in order to build up the programmes. This cautious policy has been justified by the severe financial turmoil in ########### where many of ##########;'s corporate supporters have extensive business. No attempt has been made therefore to invest the substantial surpluses generated in equities or equity based products given volatile stock market conditions in this period. All funds have been placed on bank deposit.

Policy for the future

The policy remains to build up reserves as rapidly as possible:

• as a precaution against adverse economic conditions and any consequent decline in subscription income to permit the development of ambitious programmes which are often resource hungry notably in the cultural sphere;

• to provide funds relating to the acquisition of a property which will become the permanent home of ##########;

• to provide assurance to members of staff and to those with whom we undertake commitments of ##########;'s reliability as an employer and business partner respectively.

In these circumstances and with these considerations in mind the trustees do not believe that there is any alternative to a policy of careful cash management and the build up of reserves.

4. Comment

The trustees need to be careful that amassing reserves does not become an end in itself. Although a fairly rapid build-up of reserves may be prudent for a young charity in order to provide some stability a limit needs to be set. This should strike a balance between prudence and the trustees' duty to apply the income of the charity on its charitable purposes. It is not clear from the charity's stated policy that an appropriate balance has been struck in this case.

The following words and phrases are defined in the Glossary of Terms:

•
•
•

reserves
SOFA
trustees

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Other examples

OG 43 E1

a good explanation but reserves above charity's stated optimum;

OG 43 E2

general justification for maintenance of reserves but rationale for particular level questionable;

OG 43 E3

purpose and level of reserves explained shortfall identified;

OG 43 E4

policy clearly explained but reserves currently over planned limit;

OG 43 E5

purpose and required level of reserves clearly set out; policy has recently been reviewed;

OG 43 E6

need for and purpose of reserves clearly explained but no comment on level of reserves;

OG 43 E7

general principles understood and set out but no detail as to how these will be applied;

OG 43 E8

income apparently being converted into endowment; amount of reserves actually held not clear;

OG 43 E9

reserves apparently being built up to produce income;

OG 43 E10

designated fund apparently being used as endowment; unclear why reserves are needed for purposes stated;

Index to further related information