Emma Knights’ blog about lessons to be learned from the collapse of Kids Company prompted some questions from members about the appropriate level of reserves in academies.

A key factor in the rapid collapse of the Kids Company was its complete absence of any reserves – in spite of apparent, repeated advice from its auditors that it should build up some.  Kids Company’s explanation for not following the advice was that it intended to use all of its funds to support all those who approached it for help – this have a certain hollow ring given that its collapse resulted in almost over-night withdrawal of support for those already in need. (It does echo the argument used by some governors who will not invest in organisational development whether management functions or governance training: “we don’t want to take the money from the children in the classrooms.”)

So how does this relate to academies? The first thing to remember is that academies are funded on a very different basis to Kids Company.  Part of Kids Company’s problem was that it had little, if any, regular income, relying on the ‘cause’ and the undoubted charisma of the chief executive to raise the funds needed.  For many years this had been incredibly successful, but it is a precarious existence and under the constant drip feed of negative publicity a new donor withdrew. Adequate reserves may not have stopped the ultimate demise of the Kids Company, but they would have enabled a more orderly wind-down –not least more time to find alternative means of support for the youngsters it helped and covering redundancy entitlement for staff.

Academies are in a very different place, while funding may be tight for all state funded schools, it is guaranteed that they will receive funding – and the amount is known before the start of the financial year.  It is also, to a certain extent, predictable.  In this time of effectively flat cash budgets, subject to your pupil numbers the budget for this year is going to look pretty similar to last year (even if not enough for what you want to do).  Equally importantly it arrives at regular, pre-determined intervals into your bank account  - so no cash-flow cliff edge.

In answer to a Parliamentary question in January 2015, the Department for Education stated that Academies “can build up reserves in order to accommodate longer-term plans such as capital investment, to fund maintenance and expand as well as to manage risk and uncertainty of future funding. As public sector bodies, academies and free schools are required to apply effective treasury management policies and ensure that cash is properly controlled.”

As charitable companies academies must report on their reserves policy as part of their annual accounts.  While it is possible to operate a ‘no reserves’ policy, such as the Kids Company apparently chose to do, the Charity Commission’s guidance on the subject states that:

 “Such a policy can create financial risk from the possibility of unforeseen expenditure, a shortfall in income or an inability to control costs. Trustees choosing to adopt a ‘zero level’ reserves policy should consider the financial and other risks inherent in such a policy and must explain their policy in the Trustees’ Annual Report.”

Charitable auditors will often recommend reserves equivalent to three months of operating costs – to cover short-term cash-flow issues or in extremis to enable an orderly winding up operation.  Trustees may also want to build up reserves to enable investment in new equipment or ventures.  All reserves policies must be properly thought out and decisions explainable. 

However, with regular predictable income, does an academy really need three months operating costs?  Would one or two months be more appropriate? But you might want to improve your buildings or infrastructure – and provide for the boiler blowing up.  The key thing is that as trustees you properly consider the risks and possible opportunities and plan your reserves accordingly

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