Neil Poynton, Head of Charities

Neil Poynton

Head of Charities Financial Services Transformation

Charities Aid Foundation

A strategic approach to deploying charity reserves

£17.9 billion is the amount of un-invested cash held by UK charities, according to Charity Financial Banking Spotlight 2020, a Charity Financials report based on the top 5,000 UK charities according to certain income criteria. 

There’s no denying that the past year and a half has been extremely challenging financially for many charities. For some, reserves have been utilised to adapt to meeting an ever growing demand for their services and against the backdrop of reduced fundraising and alternative income streams. Others have found the need to use reserves simply to cover working capital requirements.  

The demand placed on charities is set to continue into the foreseeable future, leading to pressure on charities’ reserves. This is why it’s an important time to reassess your approach and adopt a strategy to best deploy your charity’s hard-earned funds in the short, medium and long term.

43% of charities are already intending to make more of their reserves over the next 12 months, according to CAF’s Charity Landscape Report from December 2020. So where can you start when making the most of your charity reserves?

The Larder/Fridge/Freezer Approach

One useful approach to managing reserve funds is the Larder/Fridge/Freezer strategy – a way of structuring your funds by timeframe in order to “sweat the assets” and ultimately achieve your financial goals. The larder addresses the needs of the charity in the short term, as we do as individuals: paying regular bills, short term projects or contingency funds for the “what ifs”. The fridge aims to get a little more from your money but can be accessed relatively quickly if needed – albeit with a possible breakage penalty. The freezer is more about risk and return and “investing” for the long-term goal. 

When managing charity finances, it’s important to constantly review the situation in your larder, fridge, and freezer, considering each element together rather than individually. If you concentrate on the larder but ignore the fridge, then the strategy is flawed and you won’t get the most of your reserves.

The Larder: Day-to-day operations

The larder represents your day-to-day operations; ensuring you have a suitable cash flow and reviewing your daily and monthly transactions with current access to your accounts. It is worth considering finding a banking partner that can meet your requirements, be that access practicalities such as telephone or online banking, or even ethical considerations.

The Fridge: better returns – suitable access

The fridge is designed to get a better rate of return on your funds, while also managing the risks. This can generate income and enable you to set aside funds for specific projects with fixed-term and notice accounts. It’s worth considering access, interest rates, protections, credit rating and regular reviews.

The Freezer: working harder for better returns

The freezer is all about long-term planning to ensure your future. These assets need to be robust with well-thought out choices that will resonate with your supporters and beneficiaries. It’s about making the most of your long-term funds and generating better return on your investments that you can build on in the future. Things that need consideration include risk, reward, asset allocation, fund management and ethical considerations. Align your investments with your mission and think about what your supporters, donors and beneficiaries expect from you.

Unlike the provisions placed in the larder or fridge, your freezer assets require a far greater degree of skill and knowledge to get right. Is this something that you can do alone or will you need help? Your freezer assets need reviewing regularly and this takes commitment and time.

When investing, it is important to be clear about what you do, how you intend to do it and what are the deliverable timescales. You may be familiar with Self-Managed Portfolio and Discretionary Management Services, but you will need to give serious consideration to whether you require advice to achieve your long-term reserve deployment strategy.

It is likely to cost but it could be money well spent.

Considerations for Deploying your Reserves

When planning how to deploy your charity reserves, it is important to know and act within your charity’s powers to invest and select the investments that are the right fit for your charity. This means:

  • Assessing the suitability of investment
  • Considering diversification options
  • Seeking professional advice, unless you have valid reason for not doing so
  • Ensuring there is a balance between risk and return
  • Reviewing your investments regularly
  • Creating or updating your investment policy
  • Considering an ethical or socially responsible approach