Recommendations from the recent Charities Act Review could mean registered charities with operating expenses over $140,000 per year will be required to disclose information about the reserves they hold, and why they hold them, says Barry Baker, Partner and Not for Profit sector co-leader at Grant Thornton New Zealand. Baker expects NFPs who are not registered charities will also face pressure to disclose the same details about their reserves.
Baker says if this recommendation comes into effect, information about charities’ reserves will be made public, so they need to plan ahead for this potential change. “This is particularly the case for organisations holding significant levels of reserves. Our recent NFP sector report reveals 18% of organisations surveyed could survive on their reserves alone for two to five years. “It could be interpreted that these charities have more reserves than they need to advance their purpose, so these organisations need to develop improved reporting to clearly present their financial situation, and the purpose of their reserves to stakeholders and funders.
“And high reserves don’t necessarily mean lots of cash is on hand and ready to spend. NFPs also need to understand the makeup of their reserves and how quickly these can be converted to cash – this also needs to be clearly articulated,” says Baker.
There could also be implications for organisations with little to no reserves. Grant Thornton’s research shows around 25% of NFPs surveyed could only survive on their reserves for six months or less. Baker says, “This could cause two distinct reactions from funders and the public: they may want to donate more to support the organisation, or assume the entity is at risk and choose to invest in another organisation supporting similar causes instead.” While it may seem alarming to many organisations to have their reserves made public, it could be the catalyst for positive change throughout the sector. “NFPs should think of this as an opportunity to review the levels and possible uses for their reserves, and to consider whether they’re getting the most from them. “This proposed change might seem onerous at first, but if it gives your organisation the impetus it needs to improve financial stability or performance – even by a fraction – it will quickly pay for itself”, says Baker.
Source – Grant Thornton Press Release 8 August 2022