A consistent issue plaguing the philanthropic sector today is how much money individual charities should hold in their reserves. From the outside looking in, a philanthropic organization holding too much could indicate a reluctance to join the front line of their cause, and too little could imply slipshod management. While having anything from three to nine months is recommended, the fact is some charities’ funding requests are rejected at seven months (with concerns about sustainability) and some denied at 12 months (with respect to having too much). Such a clear contradiction brings to mind an obvious question: why?
Well, I would suggest a simple lack of clear communication. In fact, the Charity Commission specifically says that charities should use direct and specific language in their standard reserves policy rather than use the current, less precise industry standard. This way, when philanthropic organizations begin to fill their reserves past what’s necessary, it’s obvious, and they can reflect appropriately on their spending.
That said, it does seem like it’s best to err on the side of too much in reserves. This is because that even when banks refuse to grant inflated charities their requested funding (with respect to hoarding money), social investors will feel more so inclined. From a social investor’s perspective, a charity with more than the industry standard in reserve indicates a safer investment, as opposed to a charity struggling to maintain three month’s reserve.
On the other hand, if a charity has too little in reserves, the bank could very well reject them for concerns pertaining to insolvency; and if a bank is already rejecting them for worries about credibility and the ability to provide a return, then social investors will certainly be less likely to provide funding. At least with too much funding, there’s a simpler second option. Yet, still, I feel clear communication can diminish all potential misperceptions of funding in reserves.
If a charity has a direct plan articulating why it has such and such in reserves and why they need such and such in their reserves, both banks and social investors will be more inclined to listen. So long as the amount in reserves is justified, then all outside parties, both banks and social investors, will be better able to understand why charities have in reserves what they have, and by extension, they will be more willing to grant funding.
In an industry like philanthropy, there is no room or reason for something like a lack of understanding to block the way. With simple and precise language, charities can justify their reserves and attain the funding they need when they need it.