🛑 STOP Being Stupid: Week 4 of 40

Living Hand-to-Mouth is Not a Business Strategy

There’s a stupid idea floating around the charity sector that the most virtuous charity is the one that spends every single penny it receives the second it lands in the bank. This is often driven by a misunderstanding of what a healthy charity budget looks like.

A charity with no financial reserves is a time bomb.

Running a charity with a zero-reserves policy is not “efficient.” It’s not “maximising impact.” It’s an act of spectacular stupidity that puts every single beneficiary, employee, and future project at risk. It’s like sailing a ship without a life raft and calling it bravery. Your trustees should be calling it a breach of duty.

The Dual Disaster of the Empty Bank Account

A lack of reserves doesn’t just mean you run out of money. It creates a state of permanent crisis that leads to two predictable disasters:

1. The Inevitable External Shock

Charities operate in the real world. That world is chaotic. What happens when:

• Your core funder unexpectedly shifts strategy and pulls a £50k grant?
• Your primary asset (e.g., your office building or minibus) suffers catastrophic, uninsured damage?
• The Government introduces a new compliance law that requires immediate, unplanned investment in IT or training?
• A global pandemic prevents your primary income stream (like a charity shop or event) from operating for six months?

If your only response to a crisis is “panic” and “emergency fundraising,” you are guaranteeing failure. Financial resilience is how you maintain impact when the unexpected happens. Without reserves, a simple shock means staff are immediately laid off, projects cease overnight, and your beneficiaries are abandoned.

2. The Self-Inflicted Internal Stupidity

Reserves aren’t just for emergencies; they’re for good management. A lack of reserves forces stupid, short-sighted decisions:

• You can’t take advantage of opportunities (e.g., buying equipment cheaply or securing a long-term lease at a discount).
• You can’t afford to pay staff a sensible wage, leading to high turnover and loss of expertise.
• You become completely dependent on the next grant or donation, allowing funders to dictate your mission because you have no financial leverage to say ‘no’.
• You spend countless staff hours frantically chasing tiny pots of money instead of focusing on your core charitable purpose.

How to NOT Be Stupid: Write the Policy

The fix isn’t just having money; it’s having a written, board-approved Reserves Policy that justifies exactly why you have that money. The Charity Commission and every serious funder will demand to see this policy.

Here’s the bare minimum you need to do:

1. Define the Target: Your policy must state, in a specific monetary figure or a range, how much money you aim to keep in reserve. The standard rule of thumb is usually enough to cover 3 to 6 months of unrestricted operating costs (salaries, rent, utilities).
2. Define the Purpose: You must clearly state what the reserves are for. Are they to manage cash flow? To fund a future capital project? To cover redundancy costs if the charity closes? If you don’t define their purpose, they look like a pile of arbitrary savings.
3. Define the Triggers: State the circumstances under which the Trustees are authorised to use the reserves, and crucially, the plan for how they will be replenished afterward.
4. Review Annually: This is not a set-it-and-forget-it document. The Trustees must review the policy every year as part of the annual report process, confirming the reserves are still adequate and justifying the amount to the public.

Reserves are not a luxury. They are a governance necessity. Having a defined amount of readily accessible, unrestricted money is the sign of a responsible, resilient charity focused on long-term impact. Get your policy done.

Next Week: The Paper Accounts Trap

Next Friday, we pivot back to mandatory compliance and tackle the second major ECCTA shocker: The Paper Accounts Trap: Ignoring the Mandate for Software-Only Filing.

If you’ve got a Treasurer insisting reserves are ‘bad’, share this with them. It might just save your charity’s life. Subscribe now to The Art of Stupidity mailing list.