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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)
Bloodwise 39 STRATEGIC REPORT INVESTMENT POLICY AND PERFORMANCE Our investments were valued at £65.7 million at 31 March 2015 (£74.5 million at 31 March 2014) and consist of a long term main portfolio and a liquidity reserve portfolio. At the year end the value of the main portfolio was £33.2 million and delivered a total return in the year of 9.6% against an objective of 3.0%. In light of the new reserves policy during the year the Trustees chose to hold higher cash balances in the liquidity reserve, which at the year-end was £32.5 million. The liquidity reserve portfolio delivered a return of 0.8% against a target of 0.5%. These investments, together with cash held in bank current accounts and fundraised income, provide assurance that we can meet our future grant commitments when they fall due. Our investment policy doesn’t allow direct investment in tobacco companies. Bloodwise trading as Leukaemia & Lymphoma Research Company limited by guarantee 738089 Registered charity 216032 (England & Wales) SC037529 (Scotland)
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