Why Does Your Charity Need A Reserves Policy

Having a charity financial reserves policy will ensure you are able to maintain adequate free reserves to enable you to manage any reasonably foreseeable contingency.  If your 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 guide and reserves policy template is aimed primarily at small charities. 

Charity Commission CC19 - Reserves Policy

The Charity Commission Reserves policy guidance is set out in CC19.

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:

• Much your charity needs to hold in reserve and why.
• And when your charity’s reserves can be spent.
• Often the reserves policy will be reviewed.

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What Are Charity Free Reserves?

The Charity Commission defines reserves as that part of a charity’s unrestricted funds that is freely available to spend on any of the charity’s purposes.  That includes cash at the bank, deposits and other investments which can reasonably easily be turned into cash.

Free reserves should exclude:

• Restricted funds are funds that can only be used for specific purposes.
  • For example, if a funder makes a grant for a particular project, the funding may only be spent on that project.  
• Funds designated by the trustees for a specific purposes.
  • Unrestricted funds which have been set aside an essential spend or future purpose, such such as funding a project that could not be met from future income
• Fixed assets such as land and buildings, as these are not readily available to contribute towards working capital requirements.

What Amount Of Financial Reserves Should We Hold?

How much you need 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:

• What's our best estimate of how much cash might we need to see us through a crisis?
• How much would it cost us to close down? 

Questions You Might Ask In Determining Your Charity's Reserve Policy

Questions you might ask yourself in considering what your reserve policy should be. 

• How much uncertainty is there in our income forecast?
• This CEF resource shows you 4 techniques to do that well. 
• How secure are our income streams?
• What is our monthly expenditure?
• How able are we to reduce service delivery on a temporary basis in an emergency?
• How much would this reduce our costs?
• What regular expenditure might be reduced temporarily in an emergency?
• How much might this reduce costs - training, maintenance, parking planned new projects/work.
• How much would it cost us to close down?
• Redundancy, outstanding debtors etc. 

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This Resource Doesn't Constitute Professional Opinion

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.  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.