Come on, own up. How many trustees out there breathed a sigh of relief when they weren’t nominated onto the finance or audit committee when first joining a board? I thought I was safe when I joined Centrepoint nearly nine years ago given my sales and marketing background, but someone spotted I also had extensive banking experience and was probably not afraid of the numbers. But the truth is, all trustees have to get comfortable with financial matters at their charities.
Kids Company has been an example of how important it is for trustees to have a grasp of finance. It revealed what can happen if trustees aren’t switched on to the most important financial concern a charity has: its reserves.
Trustees needs to be taught to understand what reserves are (essentially rainy-day money, set aside to support the charity’s operations should income streams be held up or stop), why they are at certain levels, what risks the charity might face and how these risks are being planned for.
It’s impossible to overstate just how important a clear and well thought through reserves policy is to ensure services can still be offered throughout periods of financial difficulty. Kids Company demonstrated the worst case scenario of what can happen if a risk-aware reserves policy is not adopted: the charity closed and those that were supported are no longer receiving that support.
I also worry that Kids Company will put current and potential trustees off the sector, concerned about their financial responsibilities and whether their O-level maths is up to the job of asking about accounting. My advice is to leave your ego at the door, be brave enough to ask the seemingly daft questions and think about how you can maximise your spend on the cause with appropriate risks. Hunt out finance workshops for non-finance trustees and get yourself some one-to-one time with the finance team to build your knowledge and confidence.
Well run and well used reserves can do great things for beneficiaries. At Centrepoint, once the board got their heads around the reserves calculations and the figure that would keep us functioning, we were able to take some risk based decisions. Decisions that have allowed us to grow and develop the organisation, run under the target reserves figure at times – only when there were clear reasons for doing so – and spend our increasing fundraising income on move-through accommodation rather than mindlessly accumulating savings “just in case”.
In fact we felt morally obliged not to run with a large reserves figure, because our financial decisions must be informed by getting the best results for our beneficiaries. So we got ourselves comfortable with the spreadsheet full of different scenarios that made up the basis of the reserves calculation by encouraging questions, ensuring the finance director responded clearly and transparently and ensuring all board members were heard in the debate.
The reward for this diligence is that we have been able to grow the organisation and the people we support as a result of knowing clearly where we are financially. Taking justified risks is vital if we are to move towards our mission of ending youth homelessness and supporting all the young people that need it. To hold unnecessarily large reserves simply to be cautious is nearly as blameworthy as keeping reserves too low.
Sitting on the other side of the table in my previous role as chief executive of Canterbury Oast Trust I was able to take a similar approach and encourage the trustees to invest some of the reserves in buying a property we used as a residential home for adults with learning disabilities. The purchase gave the organisation an asset which we could invest in and develop to our high standards without fear of ploughing money into something that we didn’t own. It also meant we could, if we had to, sell it in the future.
A clear and simple business case made to the trustees, along with the fact that cash was eroding in real terms due to very low interest rates, helped smooth the decision-making process. The human side to this was staff and residents feeling the home belonged to them as ownership by the charity gave them certainty, real pride in their surroundings and an immediate desire to redecorate and improve the outdated kitchen.
So if you have reservations about your reserves and are not sure you know enough about them as a trustee, question your policy and make sure to really understand it. Ensure you are clear, whether you are taking unnecessary risks by running with reserves that are too low or whether you can do what we did at Centrepoint: grow your organisation and help more of those that you exist to support by keeping your reserves at their optimum level and under close – and critical – annual review.
Confessions of a charity professional is the Guardian Voluntary Sector Network’sanonymous series where charity workers tell it how it is. If you would like to pitch us an idea, click here.
