How to look after your charity reserves

Every charity needs a safety net. This is what reserves are for. Reserves is the money set aside to protect a charity from shortfalls in income or unexpected expenditure.

 

Reserves are unrestricted funds that can be spent on any activity that meets the organisation’s charitable purpose. It can include current assets such as cash, stock and debtors. But a charity can’t include restricted funds that are for a specific purpose in its reserves, or tangible fixed assets (for example, land and buildings).

 

 

Setting a charity reserves level

 

Trustees have a responsibility to manage the finances of a charity and plan for the future. This includes deciding on the level of reserves that a charity needs to hold. If this isn’t managed properly, a charity may either have reserves that are higher than they need to be or lower than they should be.

 

If reserves are higher than they need to be, this can limit the amount an organisation can spend on its charitable activities. Charities may also find that funders may be unwilling to support them if their reserves are too high. If reserves are too low, it may cause a charity to have financial difficulties in the future.

 

Some charities may operate without any reserves. This is because some trustees make a decision to spend all the income the organisation receives each year on charitable activities. And then other charities may not have reserves because their funders do not allow funds to be used as part of their reserves.

 

Accountancy and auditors Godfrey Wilson says that all charities have to consider their financial situations when deciding about their reserves. They should think about any restrictions on incoming funds, the diversity of different funding, the predictability of future funding, and whether there are any new sources of income coming through.

 

They should also think about whether the charity is facing any risks and how these can be reduced, as well as whether there are new projects coming up and how they will be financed.

 

Guidance on the Charity Excellence Framework says that holding around three to nine months’ worth of reserves is “generally accepted as a rough estimate of how much you should hold”. It suggests having at least three months’ worth of reserves as this is “the minimum time needed to replace the loss of a substantial income stream”.

 

 

A charity reserves policy

 

The Charity Commission expects Trustees of charities registered in England and Wales to decide on the reserve level, publish it in a reserves policy, and then monitor the reserves. This will help trustees to comply with their legal duties, including acting in the best interests of their charities and the people who use their services.

 

The reserves policy should justify and explain why the trustees are keeping a set amount of reserves. If they don’t have reserves, they need to explain this in the policy. Having a reserves policy gives people confidence in a charity and shows that its finances are properly managed, as well as helping to indicate the organisation’s future funding needs.

 

If a charity has reserves, then its reserves policy should state: how much needs to be held in reserves, when the reserves can be spent and how often the reserves policy will be reviewed.

 

 

Reporting requirements for charity reserves

 

All charities need to include a statement of their reserves policy in their annual report. If a charity doesn’t have a reserves policy, this has to be stated in the annual report. Larger charities, with an income of £500,000 or more, have more reporting requirements.

 

 

Charity reserves policies in Northern Ireland and Scotland 

 

The Scottish Charity Regulator says that it’s not a legal requirement for charities registered in Scotland to have a reserves policy, but having one can support trustees to meet their legal requirements.

 

The Charity Commission for Northern Ireland says the same applies for all charities registered in Northern Ireland. All charity trustees in Northern Ireland are obligated to focus on the best interests of their charities and the people who use them. This means maintaining reserves, if appropriate, and explaining why they hold the amount they do in a reserves policy.

 

 

Extra reading on charity reserves

 

You can read more about charity reserves on Gov.UK, The Charity Commission for Northern Ireland, and the Scottish Charity Regulator.  Godfrey Wilson also has a guide to charity reserves.

 

You can also download a charity reserves policy template and read a reserves guide for small charities on Charity Excellence Framework Network.