What are reserves?
Reserves are part of a charity’s financial assets. They are unrestricted, so available to be used as the charity sees fit. Within the category of unrestricted funds, they are classed as general funds, as opposed to designated funds.
Why do reserves matter?
When possible, charities build up reserves for several reasons. These could include:
- to ensure continuity in the event of a large variation of income
- to spend in emergencies – many charities used their reserves during the Covid-19 pandemic
- to pay for specific future projects, which the charity intends to undertake
- to bridge cash flow problems
- to cover specific liabilities
- to generate income
Not all charities have reserves but if your organisation is able to ‘save for a rainy day’ then you should consider building reserves. You should also develop a reserves policy.
Who needs to know about reserves?
Your reserves policy will set out the level of reserves your charity has decided to hold. This is usually given as a range eg £35,000-£50,000, rather than a fixed amount, a percentage of annual turnover, or a number of months’ operating costs.
The decision on the reserves to be held, as well as when and how they will be used, is up to the trustees to agree and put in place.
Their decision must be recorded in the charity’s minutes and should also be reviewed regularly. There is no fixed rule as to the minimum or maximum level of reserves that charities may hold. What is important is that trustees are able to justify their reserves policy as being in the best interest of their charity.
Charity law makes it clear that income received by charities should be spent within a reasonable period of time and that trustees should have good reasons for holding on to funds which, in most cases, will have been donated by members of the public keen to support the cause.
Where trustees do decide that it is in their charity’s best interest to hold reserves, it is important that the level is set with the charity’s income and spending commitments firmly in mind, and that the policy explains in what circumstances the reserves will be used.
It is good practice for charities to regularly review their reserves policy to ensure it is still fit for purpose. It is also vital that trustees make it clear to the public what their approach to reserves is by explaining their reserves policy in their trustees’ annual report and accounts.
Where do we start?
Consider the risks around future income, expenditure, needs and opportunities, as well as the likelihood of these arising and potential consequences.
It is important to take a strategic view. Reserves are unspent income and strategic decisions need to be made around when and how these funds are best spent. To do so, you will have to balance the need to manage risks against the need to serve beneficiaries as quickly as possible.
Your trustees need to have a good understanding of the charity’s financial strategy and business model together with the risks.
Reserves planning should form part of overall strategic planning. Your charity should look at where it wants to be (what will success look like?) and how you are going to get there (what are the milestones we will reach on the way to success? How will we achieve these milestones?)
This means having a clear financial strategy, but also understanding how reserves will be used to enable your charity to reach those goals.
Reserves are just one part of the complex financial management of a charity. Reserves need to be considered alongside things such as your fundraising strategy, risk assessments and future business planning.
Rainy Days and Reserves (article by Caron Bradshaw OBE, 2021)
Reserves: Is it surprising some charities are taking a conservative approach? (CFG article, 2020)
Beyond Reserves (CFG Publication, 2012)