How do you structure your charity's financial resources?

Your organisation’s financial management may not be as engaging as making a difference to the communities you serve, but it is vital in enabling you to deliver that difference. 

This article covers what could be described as the Cupboard, Fridge, Freezer model. This is a simple approach that you can use to manage your charity’s resources, separating your day-to-day financial needs from those required in the short term, and those that can be put away for the future. 

This article gives an overview of how you might be able to use this approach when thinking about your charity’s finances. It does not cover tax or accountancy issues, and should not be construed as advice, but aims to outline a structure you could consider before engaging with your advisers.

1. Cupboard

Firstly, you are likely to need cash that can be called on immediately to meet day-to-day needs. These are cupboard assets used to pay bills, wages, planned grants and more. You know you will be spending the money very soon, so you need easy access and the guarantee that the funds will be there when needed. In practical terms, this will usually mean in current and instant access bank accounts. 

54% of respondents to the recent Charity Finance Group Charity Banking Challenges 2024 reported issues with opening or maintaining their bank accounts. Specialist banks like CAF Bank are available for charities, and switching to one might provide substantial long-term benefits, including the speed at which you can obtain answers. Essentially, you need a bank you can rely on to do what you need, saving you time and possible costs. 

Online banking may enable you to keep a higher proportion of your funds in a savings account with a higher interest rate, transferring assets in real-time just before payments are made.

Each charity will be different, but as a starting point you might consider holding sufficient funds to cover operating costs in the ‘cupboard’. Your charity’s past patterns of expenditure and demand might help you determine a suitable balance.

2. Fridge

If you have sufficient assets to cover the day-to-day, perhaps you should consider putting some cash away for potentially better returns – these are your fridge assets. However, this will usually come with some form of restriction on access for higher rate savings accounts or increased risk for other solutions. This is because the organisation to which you entrust your assets will want to be able to rely on keeping them for a while, so they can give you a better potential return. 

Typically, fridge assets are those that you might need to access between three months and several years. We suggest this time frame as it is usually important to be sure of the value of the assets involved when you need them. For example, if you know you will need £10,000 for rent this time next year, you will want to be sure that this is the amount you will have. So, investing it in the stock market may not be appropriate, as investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. There is no guarantee about the level of capital or income returns that will be generated. 

A 12-month fixed rate account paying more than your instant access account might be acceptable. If the terms of the account mean the fixed rate will not change, you could even work out how much you need to put in to guarantee your £10,000. For example, at 5% annual interest, you would need to invest £ 9,525 today to realise £ 10,001.25 on maturity, leaving you with £ 475 for other purposes.

If sufficient assets are available, then many organisations will spread them between accounts to allow flexibility. This can cause administrative issues due to the burden of account opening, which is why cash deposit platforms are increasingly popular. These allow you to complete one application then spread the assets deposited between different terms and providers. Please see our article ‘Why use a deposit platform’ for more information.

3. Freezer

Finally, we come to the freezer. This is for assets that you can afford to commit over the longer term and can choose when to access to optimise the potential for return. These asset types will usually have a higher level of risk, but carry a greater potential for return, for example, investment in companies or funds. They will typically fluctuate in value and at any given point you might get back less than you invested. However, if the investment is successful, it should generate returns greater than your cupboard and fridge assets. Freezer assets may deliver growth in capital, a regular or growing income over time, or both. 

To quote the famous US investor Warren Buffett, however, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” 

So, when thinking about investing in any type of asset, it is important you consider factors, including, but not limited to:

1. ‘Real’ returns: Are you protected against inflation, or more simply will the money you have today buy as much in 12 months-time as it does today? The right combination of deposits and accounts could achieve this overall.
2. Alignment with your objectives – Do the assets you hold reflect your charitable objectives and mission or do any of those assets create a potential conflict with your donors or the causes and communities you support?
3. Asset protection: Have you maximised the potential to protect your assets from the failure of your account or investment provider? Up to £85,000 of your deposit with a registered UK financial institution is protected by the Financial Services Compensation Scheme. This limit applies per firm, not per account, so be aware

This is a complex subject, and further information is available via our Investment Knowledge Centre. You can also contact our Charities Team to discuss what kind of support would be right for your charity or not-for-profit organisation.

Investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. There is no guarantee about the level of capital or income returns that will be generated. Past performance is not a guide to future results.