Charities need to save for a rainy day

Whether to protect against unforseen setbacks, or to be able to take advantage of unexpected change and opportunity, there is a need to set aside some money as a reserve. Sounds kinda obvious, but this evening has involved finding out that there is slightly more to it.

Much “…public discussion of charity reserves seems to be based around the belief that holding significant amounts of reserves is tantamount to hoarding…” or profit-making. Charities therefore need to justify their reserves. Donors and the general public are entitled to reassurances that there are good reasons for keeping money in reserve. In fact, we really need to demonstrate that it would be irresponsible not to hold reserves.

The legal basis for holding reserves is an interesting area. There isn’t a specific legal rule about the amount of income that we are allowed to hold as a reserve. In fact, “…trustees are under a general legal duty to spend money within a reasonable time…” of receiving it. So, for us to be able to use money in a way that doesn’t comply with this duty, such as holding money in reserve, we need a legal power that overrides it.

Some charities do this by writing an express legal power in their governing document to hold income in reserve instead of spending it promptly. We’re looking at a different route – relying on trustees’ implied power to take actions which are necessary for the charity to function properly. As with all discretionary powers, trustees are justified in exercising their power to hold reserves if in their view it is in the charity’s best interests to do so.

This needs to be considered, recorded and justified. In fact, if it is done without justification, holding income in reserve could amount to a breach of trust.

Charities are legally obliged to report on their activities, so as a part of this we need to report on reserves. Annual reports have to explain a reserves policy, the level of reserves held and explain convincingly why we need them.

So, there we go. As with most of the areas that we’ve come across while running SYA, there’s more to it then I first realised, but it’s all fairly common sense once you read through it all. We’ll have our Reserves Policy finished soon… and surely there can’t be too many more that we need to write! 😉

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