But at least I can say, with honesty, on behalf of my current charity that::"Our reserves policy has recently been revised following a comprehensive risk assesment of every element of our operations. The Trustees believe that the level set stikes the right balance between an obligation to secure our vital work for the future and a duty to spend public donations on pressing health care needs." (and that's as much of a clue as you're going to get!)

It's not an exact quote, in fact I'm sure it changes every time, but at least it's better than: "Er, we've gone for about twelve months because that appears to be about normal and we reckon you'll wear it." The most important point to my way of thinking is to at least recognise that every charity's different and that there's no one-size-fits-all answer to the 'perfect' reserves policy.  

Don't shoot the messenger

I've never heard an attempt to produce a rational justification of the "two years represents safety" rule of thumb and I think it's basically folk wisdom inherited from the Victorians. Looking at past economic cycles I'd guess it's in fact about right, in that you would probably never expect income to drop to zero so two years operating costs would in fact keep you going for at least four years and by then the market would probably have picked up. At least you'd have time to scale back gradually rather than making drastic cuts.

Just before the 2001 stock market crash there was a fairly hefty "steer" from various charity advisers to the effect that two years' reserves were not necessary in modern economic conditions.

I am particularly bitter and twisted about this having had an argument in early 2001 with a woman who claimed (rightly or wrongly) to have been partially instrumental in "making the RSPCA spend its money on animals instead of hoarding it".  She was very cutting about the idea that something unexpected might happen and cause stock market values to drop.

As they say, the rest is history. 

Maybe part of the reluctance to justify reserves in the annual report is fear of sounding as if the charity's trying to make excuses or hide the amount by using a lot of technical jargon. A proper explanation would have to be fairly complex for a large charity with functional property and stock market investments - indeed does IG have a view on whether non-realised gains on investments ought to be treated as real money? If a charity has apparently large reserves which are in fact the result of investments gaining in value any proper explanation ought to factor in the possibility that these will have to be sold at a loss if the charity needs to realise cash during a recession.

I was hoping for examples of 'organizations with vast, unexplained quantities of cash in the bank, and that frankly look[s] dodgy'

Alnwick Garden Trust is in debt, and the rest have reserves that would last a few months according to your analysis. Where are the dodgy looking ones?

It's a good job that no-one's yet registered the Aardvark protection league.

Don't shoot the messenger

Anon2: here are some examples of charities which don't properly account for their reserves, and/or don't explain their reserves' past performance and plans for their future development:

1. Action against Hunger
2. Action for Kids
3. Afghanaid
4. Age Concern England
5. Alnwick Garden Trust

As you can probably guess, I could go on. And on. And on.

Adam, Intelligent Giving

Reserves need to be justified. Usually they can be, but if you don't bother explaining then you leave people to draw their own conclusions. An organisation I used to work for point blank refused to give any explanation of their reserves policy beyond what was required by SORP. "We don't have to", was the Finance Director's explanation. True, I told him, but then supporters don't have to give you their money either so why not help me to explain to them exactly why they should!

Don't shoot the messenger

@ Adam - Please could you give some examples?

Martin & rspcacambridge: I agree. But one thing I do wish is that charities put more effort into justifying their reserves figures. Sometimes, we come across organizations with vast, unexplained quantities of cash in the bank, and that frankly looks dodgy. But, as you say, reserves can be vital.  So why don't more charities bit of time into justifying them?

Adam, Intelligent Giving

Indeed. A bit of Google searching illustrates that there's a worrying cycle whereby the media publish more and more knocking articles about "huge reserves" up to the point of an economic downturn; followed almost instantly by ones complaining like mad about foolish charities making cuts because they don't have enough funds.

I guess part of the answer is that if you are a charity trustee or CEO and you are being put under pressure to set a deficit budget simply to reduce your reserves and you suspect you're nearing an economic downturn then you need to grit your teeth and bear any bad publicity. Or, I suppose, at least document your fears so you can say, "told you so!".

It wasn't so long ago that some charities were being crucified for having large reserves. At least they will now have the capacity to not panic immediately.

I've come across one local charity, turnover £180k a year, with a little over a week's reserves. Hasn't had more than a month's reserves at any time in the last 2 years. And if they close it will impact the local community hard.
Yet there's nothing that outsiders can do about it - its something their trustees and their supporters have to sort out for themselves.

This is why older charities, who have been through this kind of thing before, hang on to their reserves like grim death. Two years' running costs in the bank doesn't look nearly so irrational now.