CANCER

Bloodwise 38
STRATEGIC REPORT
RESERVES POLICY AND
REVIEW OF STRATEGIC RISK
MODEL
As we reported last year, the Trustees have been
taking steps over the last few years to release funds
from the balance sheet to invest in patient activities.
This has been driven by a desire to maximise patient
impact but also to alleviate the perception of a lack of
fundraising urgency because of large investment and
cash balances. We’ve already amended the terms of our
five-year programme grants so that the final two years
are contingent on the success of the first three; this has
enabled us to invest £15.4 million more in research over
the last three years.
We’ve now developed a strategic risk model that enables
us to consider different scenarios over future years for
income, operating expenditure and grant commitments.
In conjunction with our revised reserves policy, this
enables us to optimise the balance between short-term
spending and longer-term sustainability.
The Trustees have carefully considered the current
sector thinking around reserves, including guidance
from the Charity Commission; research from ACEVO,
the Charity Finance Group and the Institute of
Fundraising; and the practices of other major medical
research charities. As a consequence we’re able to
take a more progressive approach to the management
of our assets, with a greater emphasis on cash flow
management, rather than the traditional approach of
keeping assets to cover every liability.
We define our reserves as cash and investments, and
our new reserves policy requires that we maintain cash
and investments at a level:
››
not more than 24 months grant payments plus six
months operating expenses; and
››
not less than 12 months grant payments plus six
months operating expenses.
In addition, our new policy requires total assets
(excluding tangible fixed assets) to exceed current
liabilities at all times.
A traditional definition of reserves, based on net assets,
compares total assets to total liabilities, without
regard for the timeframe in which those liabilities will
become payable.
Our grant commitments are long-term, recognised as
liabilities in one year but only payable up to three years
later. Our priority is to have enough assets now to pay
the liabilities that are due now, rather than enough
assets to pay out all of our liabilities. Liquidity therefore
is a more important measure than net assets. For this
reason cash and investments are a more appropriate
definition of reserves than net assets.
The operating expenses part of the reserves policy is
to allow the organisation to respond in a considered
way to an adverse change in circumstances. We believe
that provision for six months operating costs will allow
sufficient time to enable emerging circumstances
to be assessed and appropriate plans developed and
implemented, without creating a ‘crisis response’
situation.
With the ‘3+2’ approach to grant commitments, the
maximum length of a grant liability recognised on
the balance sheet is three years. If the upper limit on
reserves is set at 36 months we’d effectively be fully
providing for future grant commitments, similar to
the current policy. The upper limit of 24 months is
considered an appropriate compromise, maintaining
pressure to spend funds raised in pursuit of our vision,
but allowing us to create a more predictable research
commitment pipeline by holding (a bit) more than the
minimum in reserve.
The reserves policy, operated in conjunction with
the strategic risk model, allows us to optimise nearterm
investment in grants whilst ensuring sufficient
financial rigour to respond to potential downside
scenarios, in particular to demonstrate that we’re not
trading insolvently.
Based on the current grants position, this policy
requires us to hold between £27.2 million and £55.1
million in liquid and readily realisable assets. At 31
March 2015, our liquidity of £68.9 million was sufficient
to cover the defined operating costs, plus 32 months
of total outstanding grant liabilities and is therefore
above the limits established by the Trustees. We expect
reserves to fall within the limits in the next financial
year, as we continue to invest for patient impact.
Bloodwise trading as Leukaemia & Lymphoma Research Company limited by guarantee 738089
Registered charity 216032 (England & Wales) SC037529 (Scotland)