1.0 Exchange 2 needs reserves to:
1.1 Meet contractual liabilities should the organisation have to close. This includes amounts due to creditors.
1.2 To meet unexpected costs like break down of essential office machinery, and legal costs defending the charity’s interest.
1.3 To replace equipment as it wears out.
1.4 To ensure that the charity can continue to provide a stable and quality service to those who need it.
1.5 To provide working capital when funding is paid in arrears.
1.6 Much of our funding has certain restrictions, which means that by law it must be held in restricted reserves until it is spent in line with the funding agreement.
2.0 Exchange 2's funding.
2.1 Exchange 2 has been funded by 29 different organisations over the last five years.
The table of funders has been removed from this web version for confidentiality reasons.
Whilst this range of funders creates a high level of administration it does provide some security in so far as at any point in time some funders are likely to be in place.
Exchange 2 plans its fund raising in advance having an eighteen month view of the cash flow. Typically it takes 12 months to secure a new funder from initial research through the application process to receiving the first cheque.
Some funders repeat their funding each year and the trustees are of the view that this pattern is likely to continue. An assessment of the risk that a funder will not renew funding is made below.
4.0 A prudent level of reserves
4.1 Exchange 2 aims to have reserves in the band 48% to 125% of current expenditure.
4.2 Were Exchange 2 to close the organisation would incur a number of winding up costs.
4.3 Estimated costs of closure
Running costs for 4 weeks £400
Creditors as per balance sheet 6/12/11 £0
Audit costs £50
Running costs incurred during time it takes to
convene a trustee meeting. 2 weeks £50
Cost of removal of building £6,000
4.4 This represents 93% of the current year’s forecast revenue expenditure of £7,000.
4.5 Assuming an ongoing organisation
There are a number of events that could occur during a year that are generally not budgeted for and would be typically funded from reserves.
Unexpected replacement of machinery £500
Provision to cover unexpected loss of a regular funder. £2,000
Cost of removing building at the end of planning permission £6,000
4.6 This represent 121% of the current years forecast expenditure of £7,000.
4.7 It is assumed that capital purchases will be funded from specific grants for capital purchases.
5.0 Restricted Funds
5.1 Exchange 2 is funded by several grant-awarding bodies and trusts and our applications place boundaries on where funding can be spent. For this reason most funding is restricted in some way. Liabilities are incurred whilst this funding is spent. An item is included for contingent liabilities in relevant funding applications.
6.0 Establishing and maintaining a prudent level of reserves.
6.1 In the event of reserves dipping below the target Exchange 2 will aim to restore the reserves to at least 48% of expenditure over the next four years. Increasing fund raising or reducing expenditure could achieve this.
6.2 If reserves exceed 125% of expenditure Exchange 2 will consider the likely expenditure over the next two years and aim of reserves to be less than 125% of turnover by the end of two years. Reducing fund raising, and increasing activities thus increasing expenditure could achieve this. Due attention will be paid to identifying funding that would sustain the expansion after the reserves had been brought below 125% of expenditure. If Exchange 2's turnover is growing year on year this might mean that there is no need to reduce reserves for the target to be met within two years.
Bringing actual reserves into line with the policy.
7.1 Reserves were £8,492 at 31/3/11 being 75% of expenditure during the year 2010/11.
7.2 The trustees have set the following targets for reserves after considering the new financial regime for employing the youth worker(s) since April 2011.
Forecast Target Reserves at year end
2011/12 £7,000 £7,000 100%
2012/13 £7,000 £7,000 100%
2013/14 £7,000 £7,000 100%
2014/15 £7,000 £7,000 100%
8.0 Monitoring and reviewing of reserves policy.
8.1 The trustees will consider current costs of closure and examine the level of reserves each year when setting the following year’s budget.
8.2 This reserves policy will be reviewed every two years.
Date approved 27-Feb-12
Next review date 27-Feb-14