Impact of surplus on fundraising

Our charity went for many years being unable to get funding due to large reserves (origionally owned several properties, some commercial in size from when it ran YTS training schemes but slowly sold off to keep main centre running).

So when on the brink of closure, started to get funders to give.
Now we are starting to get too much on hand but officers won't consider spending it. Two years accounts both showing 20% profit makes it just a tad harder to show we need £5k for this or £10k towards that.

I've had some successes explaining our current year position and sending a budget - we've recently lost a contract that was giving us almost 25% of income.

Can't explain to trustees that good financial control is also about spending money, not just saving it. Though both should be done in a good organisation.

Hmmm....anyone tried to get their trustees to agree to a research study, say of beach quality in Barbados for a few weeks, all expenses paid? :)

[quote]It's just such a strange place to be after a long period of working our way out of a deficit we wanted to get some idea of how funders view charities in this position.[/quote]
OK, to *finally* answer the actual question :grin:

I can't speak definitively for "funders in general", only for the one I work for (and we only fund very small charities/groups, which often don't have any reserves to speak of). However, I do talk with colleagues in other trusts, obviously.

My best advice is to *be transparent*. If I saw a surplus floating around in a set of accounts, then all other things being equal, I'd be quite likely to recommend that my trustees decline in favour of an organisation which was equally "good/interesting" but did not have any "free funds". However, if I saw the same amount allocated and already planned for, then that to me says "NOT freely available cash" - as long as the allocation is clear (auditors notes on same) and seems reasonable in the light of the organisation's application and annual report and accounts. If the surplus is not allocated, then it will be classifed as reserves - which may make your reserves look "too high".

Sadly, there is still a wide misunderstanding even about about reserves: "if they have so much money, why are they applying to us?" Whereas the reality for charities is that no reserves is a dangerous position to be in, particularly for those of a reasonable size, as yours is. Understanding is getting better - but I'm sorry to say that you will find that some funders still don't get it. In my experience, these are generally smaller trusts who may not have accounting expertise in the organisation and statutory funders, who do not necessarily understand the value of and need for strategy/planning and just want to see delivery. So explain it to them :)

Dear Sandre and John,

Thank you very much for your help. As you point out there are always plenty of areas for improvement and consolidation and having a breathing space to really do some strategic development is a fantastic opportunity. It's just such a strange place to be after a long period of working our way out of a deficit we wanted to get some idea of how funders view charities in this position.

[quote][quote]You mentioned that as it is not more than 10% of turnover allocation shouldn't be a problem. Is there some kind of limit in percentage terms of turnover when it becomes more difficult to account for?[/quote]
Not as far as I know - your auditor will be better placed to advise on this though. The main reason I said that was that 10% is the nearest round number and to point out that although £70K is a lot of money in real terms, it's not a huge amount in terms of the whole charity - so allocating it for some specified future need shouldn't raise the question of why it isn't being spent now unless a funder wants to get really picky with you. As John has said, thinking about the "nice to have" things is probably a good move at this point: what's on the wish list overhanging from the deficit years? Also, look at funding for individual projects - are you going to be recovering full costs from any funds restricted to those projects next year? If not, then the surplus can be allocated to meet deficits in restricted funding - your trustees can split the money into as many allocations as they like. In our experience as a funder, an organisation being given a fundraising "breathing space" in this way releases staff time for things like strategy development/review, which can be enormously valuable in strengthening the organisation - refocussing/redefining/confirming mission/objectives - the bigger picture stuff - can help an organisation become more effective (being able to see the wood would make a nice change?)

Allocations are different from restricted funds - the trustees can decide at any time to reallocate - so if they take a decision now that it's for X, and change their minds next financial year to spend the cash on Y, as long as there's an audit trail (trustees' minutes, explanations in accounts notes) to show the reasoning and it all fits with the organisation's objectives then you should be fine (usual caveat of this being layperson's opinion applies). [/quote]

[quote]You mentioned that as it is not more than 10% of turnover allocation shouldn't be a problem. Is there some kind of limit in percentage terms of turnover when it becomes more difficult to account for?[/quote]
Not as far as I know - your auditor will be better placed to advise on this though. The main reason I said that was that 10% is the nearest round number and to point out that although £70K is a lot of money in real terms, it's not a huge amount in terms of the whole charity - so allocating it for some specified future need shouldn't raise the question of why it isn't being spent now unless a funder wants to get really picky with you. As John has said, thinking about the "nice to have" things is probably a good move at this point: what's on the wish list overhanging from the deficit years? Also, look at funding for individual projects - are you going to be recovering full costs from any funds restricted to those projects next year? If not, then the surplus can be allocated to meet deficits in restricted funding - your trustees can split the money into as many allocations as they like. In our experience as a funder, an organisation being given a fundraising "breathing space" in this way releases staff time for things like strategy development/review, which can be enormously valuable in strengthening the organisation - refocussing/redefining/confirming mission/objectives - the bigger picture stuff - can help an organisation become more effective (being able to see the wood would make a nice change?)

Allocations are different from restricted funds - the trustees can decide at any time to reallocate - so if they take a decision now that it's for X, and change their minds next financial year to spend the cash on Y, as long as there's an audit trail (trustees' minutes, explanations in accounts notes) to show the reasoning and it all fits with the organisation's objectives then you should be fine (usual caveat of this being layperson's opinion applies).

Sarah,
What a lovely place to be! You probably don't want to set up a new project from what could be a nice 'blip', but there's plenty else.

Do you need to update your website or databases etc. - actions that will improve the information / service / support to your cause and beneficiaries? All making you a much more attractive organisation. A good story to be tell in your next reports - how you used this surplus to become more effective in your mission.

John

Dear Sandre,

Many thanks for your reply. Yes, very happily this is surplus after reserves, and is unrestricted funds. It's a very pleasant problem to deal with. We are however concerned that we do not jeopardise future funding applications and make sure our funders can see that this is built on sound strategic development, as it is. Our main problem is that this far into the financial year we feel we are not ready to spend the whole of the surplus/allocate all to reserves without more thinking and planning.

You mentioned that as it is not more than 10% of turnover allocation shouldn't be a problem. Is there some kind of limit in percentage terms of turnover when it becomes more difficult to account for?

best wishes

sarah

[quote]Is this "surplus after reserves"? And are they unrestricted funds?

If the charity has no reserves, then I can't see a problem with allocating the surplus funds to a reserve - although this is on the assumption that the money is unrestricted (i.e. donors did not expect it to be spent on something specific). If donor understanding is that funds were to be spent on a particular thing (your message implies not, but just in case) then within reason they should be contacted to ask whether they are happy for their donations to be spent elsewhere: certainly larger/trust donors should be contacted.

If the funds are unrestricted and surplus after reserves - lucky you and congratulations! Obviously, if your charity wants to expand its operations then it will want to make sure that any proposed activity is sustainable, unless you run one-off projects. I am not an accountant, but my understanding is that SORP allows for unrestricted funds to be allocated by the charity's trustees to a defined and timed future need - and there should be a note in the audited accounts to explain the allocation. As the surplus is less than 10% of turnover, I can't see that allocation would be a problem.

For example, a charity that knows it will be relocating in the next 12 months can allocate funds for moving costs - which means that they would show as allocated funds in the accounts rather than surplus (i.e. "already spent" - just not paid out yet). Capital expenditure and funding for seeding new projects can also be allocated in this way - e.g. new project X to start [date] will cost £20K, £10K surplus allocated to this project in the accounts, £10K match funding to be raised next financial year. Etc. Your auditors will be able to explain what is and is not acceptable and give good guidance on timescales: my layperson's opinion would suggest that holding allocated funds for 12 months would just indicate good planning/management, might get away with 24 months for large capital expenditure, but unless you're building a new hospital/similar I would think that you'd need a very good reason for hanging onto significant allocated funds any longer.

(not an accountant)[/quote]

Is this "surplus after reserves"? And are they unrestricted funds?

If the charity has no reserves, then I can't see a problem with allocating the surplus funds to a reserve - although this is on the assumption that the money is unrestricted (i.e. donors did not expect it to be spent on something specific). If donor understanding is that funds were to be spent on a particular thing (your message implies not, but just in case) then within reason they should be contacted to ask whether they are happy for their donations to be spent elsewhere: certainly larger/trust donors should be contacted.

If the funds are unrestricted and surplus after reserves - lucky you and congratulations! Obviously, if your charity wants to expand its operations then it will want to make sure that any proposed activity is sustainable, unless you run one-off projects. I am not an accountant, but my understanding is that SORP allows for unrestricted funds to be allocated by the charity's trustees to a defined and timed future need - and there should be a note in the audited accounts to explain the allocation. As the surplus is less than 10% of turnover, I can't see that allocation would be a problem.

For example, a charity that knows it will be relocating in the next 12 months can allocate funds for moving costs - which means that they would show as allocated funds in the accounts rather than surplus (i.e. "already spent" - just not paid out yet). Capital expenditure and funding for seeding new projects can also be allocated in this way - e.g. new project X to start [date] will cost £20K, £10K surplus allocated to this project in the accounts, £10K match funding to be raised next financial year. Etc. Your auditors will be able to explain what is and is not acceptable and give good guidance on timescales: my layperson's opinion would suggest that holding allocated funds for 12 months would just indicate good planning/management, might get away with 24 months for large capital expenditure, but unless you're building a new hospital/similar I would think that you'd need a very good reason for hanging onto significant allocated funds any longer.

(not an accountant)