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Adam Rothwell
- Thursday, March 12, 2009
Eagle-eyed visitors to this site may have noticed that we’ve removed the ‘reserves would last ’ figure from our detailed charity profiles. We’ve been thinking and talking about this issue at IG HQ for some time, and in the interests of transparency we thought we should let you know what’s going on. But first, a warning: this article is (probably) strictly for accountants, and those with extra-long attention spans.
Our 'reserves would last' figure included unrestricted and designated funds carried over at the charity’s financial year-end. These amounts include cash and other assets which have not been legally restricted to a certain type of charitable activity or work. So this figure should be the amount of money a charity can spend in any way it chooses, in line with its objects. After working out this figure, we calculated how long this money would last, if all income to the charity dried up, yet expenditure continued at the same rate.
To some extent, this reflected the Charity Commission’s definition of reserves as:
“that part of a charity’s income funds that is freely available. ‘Reserves’ are therefore the resources the charity has or can make available to spend for any or all the charity’s purposes once it has met its commitments and covered its other planned expenditure . . . This definition of reserves therefore normally excludes:
- Permanent endowment;
- Expendable endowment;
- Restricted funds;
- Any part of the unrestricted fund not readily available for spending, specifically:
- Income funds which could only be realised by disposing of fixed assets held for charity use and programme related investments.”
However, since this description of reserves is ambiguous, and seeing as there's no other acknowledged definition, some charities include endowments and other cash from restricted funds in their reserves figures. Charities also treat ‘unrestricted funds’ differently – with some including the value of their properties and investments in the amount, whilst others do not.
This ambiguity meant that our 'reserves would last' figure was often misleading, and only rarely gave the full picture of how much 'spare cash' the charity could spend 'however it chose' - which is what we thought the figure would indicate.
So after much discussion, and some much-appreciated advice from Charity Commission big-wigs, we’ve stopped quoting this figure. However, we still think it’s important to have some measure of readily available cash in any charity's bank account. Not least, this figure can can have a big impact on how the charity operates, something that's been amply demonstrated by recent troubles at CLIC Sargent, which is experiencing a serious financial pinch. Its reserves could only last five more weeks, and staff - including the CEO - have had to leave the charity to help save money.
So where does that leave us? Well, we're trying to find a replacement to our old 'reserves would last' figure that gives a more accurate representation of how much 'spare' cash a charity has to spend. We're thinking of using the charity's working capital as a replacement - i.e. its current assets minus liabilities. Do you think this sounds like a good idea? Let us know in the comments below.
Graham - I think that's a really excellent point, and one we hadn't thought of. Because our charity profiles are based on annual reports (which by definition are only 'new' once a year), much of the data on them is prone to go 'out of date' relatively quickly. However, I think having a 'snapshot' of reserves, as you say, might be particularly misleading. We'll have a think about your point - and get back to you on what we decide...
Adam, Intelligent Giving
How do you define "current assets"? If it doesn't include assets like shares, the figure's going to be too small, but if it includes functional assets, like buildings used by the charity for its work, it's going to be unrealistically large. Plus, I think the current state of the economy makes a lot of this meaningless. Some perfectly well-managed charities are going to have serious paper losses on investments which are not their fault.
I guess there's an argument that a prudently-managed charity will have x months working capital stashed away in a form that's not going to evaporate overnight, so maybe the "cash at bank and in hand" figure from the accounts would be meaningful.
Given the current economic climate, I doubt that many charities will be seeing a growth in reserves for the foreseeable future. In fact, quite the opposite, with reserves be used for the very purpose they need them for - to help survive when the income levels drop.
I wouldn't be rushing to reintroduce that information on profiles at present, as the amount of reserves is likely to change considerably for charities if they are having to draw on them, leaving people with a very misleading "snapshot" of them. It may, therefore, help charities at the moment to not focus on their reserves, so that people can see what a struggle it is just to get in enough cash to survive! (cf Clic Sargent and others)
rspca - All those points are good ones, I think, and (pace Graham) if we do decide to go with the 'working capital' definition, we'll have to find a way of overcoming them equitably. Thanks for bringing them up: we'll certainly consider what you say.
Adam, Intelligent Giving