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Use this guide to download a best practice, example UK charity reserves policy template that is simple and based on the Charity Commission CC19 guidance on charity reserves. It is intended primarily for small charities. This guide also covers other areas, such as an explanation of Charity Commission CC19 reserves policy, calculating and investing financial reserves, how much reserves to hold and financial reserves definitions, including free and unrestricted.
A charity reserves policy ensures you will be able to maintain adequate free reserves to manage any reasonably foreseeable contingency and comply with Charity Commission guidance. If your financial reserves are too low, you put your charity’s future at risk and, if too high, funders may be unwilling to support you. This simple reserves guide is aimed primarily at small charities.
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The Charity Commission reserves policy guidance is set out in CC19 - Charity Reserves: Building Resilience
There is no single level, or even a range of, reserves that is right for all charities. Any target set by trustees for the level of reserves to be held should reflect the particular circumstances of the individual charity. To do this, trustees need to know why the charity should hold reserves and, having identified those needs, the trustees should consider how much should be held to meet them.
Your reserves policy should set out how:
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How much reserves your charity should have depends on a number of factors, but 3 to 9 months is generally accepted as a rough estimate of how much you should hold. My own crude rule of thumb is a minimum of 3 months, because I reckon that's the minimum time needed to replace the loss of a substantial income stream.
Two things to consider:
There is no specific calculation to use in calculating the free reserves your charity might need. These are questions you might ask yourself in considering what your financial reserves policy should be.
Financial reserves may be needed in the short to medium term. Consequently, whilst investing charity reserves is not an issue, this should be done in a way that ensures the financial reserves can be readily realised as cash, if needed.
Restricted reserves are those assets that may only be spent for a specific purpose. The Charity Commission defines unrestricted reserves as that part of a charity’s funds which is freely available to spend on any of the charity’s purposes.
Designated charity reserves have been designated by the trustees for a specific purposes. That is unrestricted funds which have been set aside as an essential spend or future purpose, such as funding a project that could not be met from future income. For example, major but essential building work such as a new building or replacing a roof.
Charity free reserves a narrower definition than total unrestricted funds, excluding any funds that are not readily available for spending. Examples of free reserves might include cash at the bank, readily available deposits and other investments which can reasonably easily be turned into cash.
Free reserves should exclude restricted and designated reserves and fixed assets such as land and buildings, as these are not readily available to contribute towards working capital requirements.
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I have worked in the sector at senior level for many years and, for those who value these, I hold a number of professional qualifications, including from ACCA. However, I am not an accountant or lawyer and no advice can be applicable to all organisations, in all circumstances, so this resource does not constitute professional opinion. Essentially, I've summarised the regulatory guidance and augmented this with my own experience and Internet research to create a layman's guide, with links to the source guidance. I hope you found it useful. I am not competent to provide professional advice but you can find this pro bono using the Help Finder directory.
