The Australian Charities and Not-for-profits Commission (ACNC) has released Charity reserve: financial stability and sustainability, which encourages charities to maintain cash reserves to ensure financial stability.
The fact sheet provides general guidance on reserves, covering:
- What reserves are and where they come from
- Why it is important to have reserves
- Appropriate levels of reserves, and
- Who has responsibility for reserves?
ACNC commissioner Susan Pascoe said that the myth that charities should not make a profit or have money in reserve damaged the sector. She hoped that the guidance’s release would help to correct misinformation.
Reserves play an important role in the financial stability and long-term sustainability of a charity, and managing them is an important part of a charity’s overall financial management, a crucial element of good governance.
In line with good governance and proper risk-management, a charities’ boards, committees and governing bodies should consider an appropriate level of reserves and a strategy for building or spending them that is consistent with its purpose.
‘Charities are often trying to get by on very little and sometimes are worried that if they build up healthy reserves, they’ll struggle to secure funding. We need to explain to the public that charities need to operate on a sustainable footing to be able to continue their work from one year to the next. Making a profit allows a charity to build reserves and become sustainable,’ Ms Pascoe said.
‘Charities should have reserves set aside to cover unexpected events or costs – a fund set aside for a rainy day. Even small charities would benefit from a small reserve.
‘Maintaining an appropriate level of reserves is responsible financial management. It is important that charity boards properly consider maintaining and managing reserves. This guidance outlines the key considerations for developing a good reserves policy.
‘It is important for charities to be transparent about finances. Charity boards should make an effort to explain to funders, donors and the public why they need reserves and the justifications for the decisions they make.’
The guidance document can be found on the ACNC website at acnc.gov.au/charityreserves.
If a charity is a private ancillary fund or a public ancillary fund, it will have different obligations concerning accumulating and distributing reserves.