Risk & reserves
Kate Sayer of Sayer Vincent is an expert on the subject of reserves, having written many articles in sector press and publishing several guides, including Beyond Reserves and Reserves policies made simple.
Impact of different business models on setting a reserves policy
The extent to which you need reserves depends on the financial risks your charity faces. The business model, or a combination of several business models, provides the first indication of the level of financial risk faced by your charity and therefore provides a starting point for establishing an appropriate level of reserves. If your charity has reliable income and makes grants, then it only needs to manage the timing of cash inflows and outflows, with little need for reserves. Charities with less reliable income need a higher level of reserves because it will be harder for them to manage fluctuating income. However, reserves are only needed for fairly short-term commitments if their costs are flexible. For example, a grant-making charity that relies on fundraising events decides to only make commitments to beneficiaries when they know they have the funds available. They only need reserves to cover their running costs to manage the risk of shortfalls or delays to income. This is a sensible adjustment to their operating model which reduces the need for reserves.
Reserves are only one way to manage risk
If your charity has a business model that requires a high level of reserves, then it might be more appropriate to make changes to your model rather than seek to amass your reserves. This may require radical change such as changing the method of delivering services. One charity we know had been delivering services with funding from grants and contracts. They decided that it was an unsustainable business model and changed it. They changed their business model to providing consultancy and training to public sector and other third sector bodies working in their field, enabling them to leverage their knowledge to have a greater reach and greater impact. Kate will be speaking on ‘Using reserves wisely’ at CFG's Risk & Sustainability Conference 2017.
Charity Governance Code
Taking on the role of Chair of the Charity Governance Code, Rosie Chapman reviewed and engaged with charities, governance experts, funders, regulators and representative bodies to overhaul the Code.
This July an updated version of the Charity Governance Code was published. One of the new features in the updated Code is asking charities to take into account the impact of cumulative risks on their organisation. To some extent, we have seen improvements in risk management in charities and much better understanding of the need for charities to understand the key strategic risks that they face. But risk is often not as straightforward as simply watching out for those ‘big-ticket’ items. Often the greatest danger can come from a combination of smaller threats, under the radar, turning what on their own may be isolated issues into strategic problems for the charity. The Code addresses this and asks trustees to consider the cumulative effect of risks, not merely individual risks in isolation. Again, the Board should be an active partner in this exercise. It can be challenging for those involved in the operations of charities and that work day to day with these risks in mind, to identify the cumulative impact. The benefit of a non-executive board of trustees is to enable the dots to be connected and ask probing questions about how different issues may combine to undermine the charity’s strategic goals and ambitions. For more on the updated Charity Governance Code, catch Rosie's session at the Risk & Sustainability Conference 2017.
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