Charities Cautioned to Avoid Cash Crisis

The idea that charities should not make a profit is a myth, according to the national charity regulator which is calling on not for profits to maintain cash reserves and avoid a cash crisis.

The Australian Charities and Not-for-profits Commission (ACNC) has released a new guide advising charities on maintaining and managing reserves in a bid to ensure financial stability and sustainability.

ACNC commissioner Susan Pascoe AM said she hoped the release of the guidance would help correct misinformation which is proving damaging for the sector.

“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,” Pascoe said.

“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.”

The guide, Charity Reserves: Financial Stability and Sustainability developed in collaboration with Not-for-profit Law at Justice Connect, covers what reserves are, where they come from, why it is important to have reserves, appropriate levels of reserves and who has responsibility for them.

Pascoe said all charities should have funds set aside “for a rainy day”, in case of unexpected costs or events.

“Even small charities would benefit from a small reserve,” she said.

“Maintaining an appropriate level of reserves is responsible financial management.

“A charity’s board should make sure that the charity is resilient enough to deal with unexpected costs and adverse situations.”

Pascoe also highlighted the need for funders to understand that charities, like other enterprises, need reserves.

“Reserves bring financial stability and sustainability. This allows charities to focus on their core services and provide better outcomes for the community over a longer period,” she said.

“We encourage funders and donors to consider the long-term benefits of charities maintaining reserves, and to not disadvantage them if they have taken prudent steps to build reserves.

“Too often charities may feel that they have to go into ‘starvation mode’ to appear deserving of support; this serves nobody well, least of all the people they are working to support.

“Charities with limited reserves leave themselves vulnerable to financial struggles which can affect services in the long run. Funders and donors should want to invest in and support sustainable programs that have a medium- or long-term future.

“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.”

Australian Institute of Company Directors (AICD) managing director and CEO John Brogden welcomed the guidance.

“It’s essential that charities have the reserves they need to meet future challenges and to re-invest in their organisations. If they don’t have those reserves, the long-term sustainability of a charity is at risk,” Brogden said.

“The AICD’s 2016 NFP Governance and Performance Study highlighted the need for not for profits to be financially strong.

“This includes aiming to make a profit so they can build reserves to meet the myriad challenges they may face.”

Governance Institute of Australia national director of policy and advocacy Judith Fox said it was important that there was a focus on financial management and sustainability, as well as the management of risk, in charity governance.

“The ACNC’s guide to reserves reminds charity boards of this,” Fox said.

“Good charity governance must include serious considerations of finances, and it is crucial that reserves are included in these considerations. Charity boards should not be afraid of embracing better financial practices to ensure better services and outcomes.

“The ACNC’s guide to charity reserves gives charity boards a good overview of the importance of maintaining reserves. All charity boards that are serious about developing a long-term plan and sustainability should read the guide.”

The new guidance document can be found here.