Charity plight highlights role of financial reserves

Canterbury charity plight highlights role of financial reserves

The Canterbury West Coast Air Rescue Trust is usually putting away extra money at this time of year to get through the holiday season – the busiest time of year for rescues.

But, that critical savings period has been upended by the Kaikoura quake and the cost of extra flights to help locals amounting to hundreds of thousands of dollars, depleting the charity’s financial reserves and leaving them in a precarious position.

The Trust has a long-term goal of building financial reserves, a journey that is challenging given its mission numbers and costs are increasing year on year and fundraising targets in line with that. This comes along with the added pressure of building reserves in a very competitive funding environment.

An incident like the 7.8 earthquake adds a whole new dimension of financial pressure and the Trust has appealed to its community for support, with the goal to raise $300,000 by 22nd December to ensure it can deliver this life saving service.

The Trust’s experience is pertinent to all charities, an example of why building sufficient financial reserves matters and how difficult it can be to do so.

A recent BDO survey of not-for-profit sector knowledge and views on financial reserves, showed that many struggle with building adequate reserves; a critical thing to get right given the different forces at play in the current market: low interest rates, highly competitive funding, financial reporting regulations – not to mention an increased risk of earthquakes.

Most of the 471 respondents felt their reserves were insufficient with only 3% saying they had too much in reserve and 4% saying they didn’t know. Furthermore, around half of the respondents were not aware of an organisational financial reserves policy being in place – so there’s room for improvement.

Once in place, this contingency of ‘financial reserves’ can help an organisation weather unexpected financial crises such as natural disasters, loss of income, to meet capital costs as required, cope with a tax audit, make investment decisions … the reasons are numerous.

And critically, funders and donors want to see that a charity has enough money set aside to be financially robust whilst not sitting on unspent cash without good reason.

This all highlights the critical need for robust financial reserves policy and planning – not only for the reasons outlined but because a financial reserves policy provides wider benefits as a framework for internal decision-making and externally, as a point of reference to support funding applications and donor appeals.

Off the back of our research, BDO has worked with sector focus groups delving into the specific issues and developed some comprehensive advice across key areas from cash reserves versus net asset reserves, setting minimum and target reserve levels and developing and implementing a financial reserves policy through to monitoring of and reporting on key criteria.

Perhaps the most compelling piece of advice for charities beyond the technicalities of financial reserves planning and management, is convincing their funders that they have got it right.

That means learning how to tell a convincing, transparent story about the work their organisation does to their funders, donors, and other stakeholders - linking financial data with the non-financial measures to tell that story.

Certainly, reserves are a key part of the financial data, but when viewed in isolation they do not convey the wider story, the organisational narrative that is so central to everything it stands for.

Ultimately, whilst financial reserves may be something that sits in the background for many NFP organisations, the reality is that it serves not only as a contingency, but a properly formed policy can play a core role in the sustainable operations of an organisation.

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