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Reserves policy

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Along with your general financial objectives, your reserves policy sets the tone of the financial approach of your organisation. You want to demonstrate a thoughtful and assertive use of your assets.

Often, however, reserves policies are paper exercises for compliance purposes because reserves are seen as inert money you can’t use – a ‘rainy day’ savings fund in case of dire emergency which stereotypically the accountants want to preserve, and the operational staff want to spend.  It can also seem pointless to be thinking about saving up in an environment where you struggle to break even, which is why the suggested policy is written in terms of purpose – ‘to protect the continuity of our core work’ - rather than ‘to cover three months of unrestricted spending’.

Your organisation will need to go through each of the criteria and put a number to it, or perhaps a range of numbers.  Here are some things you may want to consider:

To provide a level of working capital that protects the continuity of our [core] work
  • What is the core work that we would want to protect?
  • How much does that cost?
  • Do we spend evenly or are there peaks and troughs?
  • How is it funded?
    • Level of security/predictability
    • Arrears/advance
    • Regular/irregular
To provide a level of funding for unexpected opportunities
  • What opportunities have arisen in recent years?
  • What capacity could we have for new opportunities?
  • Results of horizon scanning from annual planning
To provide cover for risks such as unforeseen expenditure or unanticipated loss of income
  • Review of risk register
  • Review of recent years’ experience

It is also a good idea to bear in mind the disclosure requirements on reserves for the trustees annual report and make sure that any policy easily allows you to comply with these.  You have to state:

  • the level of reserves held
  • why they are held
  • the purpose of material designated funds and if for future expenditure, the likely timing of that.

Like any forecasting exercise, this isn’t easy but there is plenty of good guidance to refer to – you could start with:

Templates

NCVO members can download our financial procedures manual templates.

 

Page last edited May 30, 2019

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