Looking after the reserves

For once I am not talking about wildlife reserves, but charity financial reserves.

It is considered good practice for a charity to have financial reserves to see them through a rainy day. How big those reserves are varies enormously, but  a lot of charities calculate it on a number of weeks’ running costs.

Eight  to 12 weeks' running costs are often seen as an ideal amount, but many charities sit on huge reserves. 

I have always thought that reserves should be kept to an absolute minimum as people do not donate to a charity in order for it to hoard money. But clearly one should always have enough to cope with any unforeseen cash flow issues.

I personally think six to eight weeks is what is needed (ie more than a month). The Trustees of World Land Trust (WLT) disagree and, rightly since they have ultimate responsibility, our target is at least eight weeks.

However, in a recent edition of Third Sector magazine, Sir Stuart Etherington makes an interesting point when he states: “Charities keep reserves to see them through rainy days, but it’s been raining for a long time now.”

It’s a difficult one: how much money should a charity have in the bank? Clearly a buffer of some sort is essential, but six, eight, 12 weeks? or a year?

How much is enough?