Financial Reserves Policy - Updated April 2016
This policy should be read with reference to the document Charities and Reserves (CC19) from the Charity Commission. http://www.charitycommission.gov.uk/publications/cc19.aspx.
As an Association of Clubs we are not an exempt charity (not being registered as a Charity) just an operating organisation.
As an organisation with funds we expect to maintain financial propriety and as such require a reserves policy.
It is good practice to follow Charity Commission guidance when setting a reserves policy. Their guidance is based on the requirements of charity law, the Charities SORP and good practice.
Charity Commission guidance states that: ‘Reserves are that part of a charity’s unrestricted funds that is freely available to spend on any of the charity’s purposes. This definition excludes restricted income funds and endowment funds, although holding such funds may influence a charity’s reserves policy. Reserves will also normally exclude tangible fixed assets held for the charity’s use and amounts designated for essential future spending.
Deciding the level of reserves that our Association needs to hold is an important part of financial management and forward financial planning. Reserves levels which are higher than necessary may tie up money unnecessarily. Holding excessive reserves can unnecessarily limit the amount spent on our various activities, reducing the potential benefits the Association can provide. However, if reserves are too low then the Association’s solvency and its future activities can be put at risk. All organisations need to develop a policy on reserves which establishes a level of reserves that is right for that particular organisation and clearly explains to its stakeholders (in our case member Clubs) why holding these reserves is necessary.
The Charity Commission reminds trustees that:
Charity law requires any income received by a charity to be spent within a reasonable period of receipt. Trustees should be able to justify the holding of income as reserves.
Reserves are that part of a charity’s unrestricted income funds that is freely available to spend.
Where the trustees have a reserves policy, this policy must be set out in the trustees’ annual report.
If the trustees have not set a reserves policy, this should be stated in the trustees’ annual report.
A good reserves policy takes into account the charity’s financial circumstances and other relevant factors.
It is good practice to monitor the level of reserves held throughout the year.
FINANCIAL RESERVES POLICY
The National Board need to consider the level of reserves the Association should hold. Levels of reserves which are too high tie up money which should be spent on current Association activities. Levels of reserves which are too low may put the future activities of the Association at risk.
The Association’s reserves policy
The Association’s reserves policy:
Assists in strategic planning by considering how new initiatives, projects or activities will be funded.
Informs the budget process by considering whether reserves need to be used during the financial year or built up for future projects.
Informs the budget and risk management process by identifying any uncertainty in future income streams.
During the financial year
The National Board identify:
When reserves are drawn on, so that they understand the reasons for this and can consider what corrective action, if any, needs to be taken.
When reserve levels rise significantly above target so that they understand the reasons and can consider the corrective action, if any that needs to be taken.
Where the reserves level is below target, and consider whether this is due to short-term circumstance or longer term reasons which might trigger a broader review of finances and reserves.
Development of the Association’s Reserves Policy
When considering an appropriate level of reserves, the National Board consider:
The risk of unforeseen emergency or other unexpected need for funds.
Covering unforeseen day-to-day operational costs.
A fall in a source of income, such as capitation.
Planned commitments that cannot be met by future income alone, for example plans for a major IT project.
The need to fund potential deficits in a cash budget, for example money may need to be spent before another income stream is received.
The financial risks identified determine the amount of reserves the Association targets to hold.
In-year reports to the National Board
In-year reports to the National Board:
Compare the amount of reserves held with the target amount or target range set for reserves.
Explain any shortfall or excess in reserves against target set.
Explain any action being taken or planned to bring reserves into line with target.
Annual financial statements
At the Association, the Reserves Policy disclosed in the Treasurer’s report will include the following information:
Why reserves are held.
What amount/range of reserves is considered appropriate for the Association.
What the level of reserves is at the year end.
How the Association is going to achieve the desired level or range of reserves.
How often the reserves policy is reviewed.
Target range of reserves for the financial year
Our reserves have historically been kept as cash in the bank. We have at present a Bank of Scotland account where we invest our surplus on fixed term deposits (FTD) for a higher rate of interest.
At the time of writing this revision, we have approx. £60k in a single 1 year FTD which matures in June. This allows us to invest when we are cash rich, at the start of the year when capitation rolls in, while allowing us to draw down cash at the end of each FTD if needed.
A working balance is held in the Barclays Instant Access Savings account to cover know expenditure patterns.
To keep the club financially stable, it is important that we maintain a level of reserves sufficient to meet our continuing obligations.
Based on the information to hand, our main items of expenditure are:
Magazine £13k per issue - April, July, November
Insurance renewal £11k - February
Meetings £27k – Feb, April, June, October, includes expensesRTBI Admin contract £27k, paid monthly
Insurance must be purchased, and although our 3 year contract with Round Table for the Admin comes to an end this year, something would need to replace it. We are required to hold an AGM and 3 NC meetings, so these need to be covered as well. The magazine, although budgeted for, is classed as optional expenditure – if we hit a financial crisis, it could easily be pulled / delayed. Other items of expenditure, including expenses, could likewise be delayed with no reputational loss. Note that this would reduce the cost of the AGM / NC meetings by the weekend allowance and mileage of all who attended, bringing the cost of them down to less than £10k.
So this leaves us with a minimum reserve level of £48k, to cover insurance (£11k), the admin contract (£27k) and meetings (£10k). To allow for a margin of error, it is recommended that an additional 20% contingency, i.e. £60k in round figures.
At the 2015 AGM a Resolution to fix the Reserves at a minimum of six months of the Annual Total Expenditure of the Association was carried. This set the Reserves between £115 – 117,000.
Actual surplus / deficit levels for each year end will be reflected in the appendix as and when they are available.
Assuming that the 2017 Budget is approved, the target reserves for the end of the year should be £111,400 based on the 2015 AGM resolution. The latest cash-flow forecast published predicts the level will acutally be £105k, which is still sufficient to cover costs if the Association was to close down within a year.
Monitoring and evaluation of the policy
This policy will be monitored regularly for any changes in legislation or directions from central government which may have an effect and evaluated in the light of any comments made by the auditors and any other interested parties.
The Treasurer and National Board will carry out a review of this policy on a regular basis to ensure that any new or changed legislation is adhered to.
Next Association Review due: April 2017
Mark Fairchild National Treasurer 2012 - 2017