Gaps in charities' reserves position highlight ‘financial vulnerability’ of the sector

Written by Lauren Weymouth

Charities need to address the ‘concerning’ gaps in how they calculate their reserves position before it leads to financial vulnerability, research has revealed.

According to new data from tax and audit firm RSM, the majority of charities have gaps in how they calculate reserves and how they communicate their plans with internal and external audiences – findings that highlight just how financially vulnerable the charity sector is.

The statistics, taken from RSM’s Charity Reserves: resilience in 2018 report, highlighted that 94 per cent of the charities researched needed to make improvements to their charity reserves policy and over 22 per cent needed to make significant improvements.

RSM head of charities, Nick Sladden said the gaps are a “concern for the charity sector” because errors could lead to “inaccurate representation of financial strength”.

“It is critical these shortfalls are tackled. In turbulent times, financial resilience will help charities to stay flexible and adaptable, so they can continue to fulfill their commitments to beneficiaries. A well thought out reserves policy is now more important than ever before,” Sladden said.

In its recent Funding and Functionality report, RSM also highlighted that over a quarter of charities have between nothing and three months operating costs in the pot, showcasing the small margins many charities are working with. Furthermore, 50 per cent of charities are using reserves to control cash flow, the research found.

“Operating at the limit puts pressure on financial reporting as organisations needs to have accurate and timely information to ensure they do not go over the edge,” Sladden added.

“It’s also worrying to see so many charities dipping into the reserves to control overheads as this is not a sustainable long-term strategy.

“Getting the reserve policy right is an ongoing balancing act. Too little, and charities could be exposed to shifts in donor contributions, contracts and fundraising; and too much, and questions could be asked about whether charities are applying their resources in the best interest of beneficiaries. So, it’s vital that this position is accurate and reviewed on a regular basis to ensure the charity is covered.”

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