Reserves are the unrestricted funds belonging to a charity that are freely available to spend on any of the charity’s purposes. This can include money which is currently invested, but does not include restricted funds or designated funds. If your charity has reserves, you should be able to explain to funders, donors, beneficiaries and other stakeholders the reasons why you are holding funds in reserve.
In order to understand how much your charity currently has in reserves you need to understand the nature of the funds your charity holds. These will be made up of restricted funds, unrestricted funds or both.
Permanent Endowment Funds have been given to be held permanently as capital and not spent.
Restricted Expendable Funds can be spent but have a specific restriction on how the money can be used.
Expendable Endowment have been given to be held as capital but the trustees have discretion to use as income.
Unrestricted Funds have not been earmarked and may be used for any of the purposes of the charity.
Designated Funds are unrestricted funds that have been earmarked for a particular purpose by the trustees.
Your charity’s current reserves are the unrestricted funds your charity holds that have not been earmarked and may be used for any of the purposes of the charity.
Some trustees decide not to keep reserves and to spend all of the charity’s income each year on the charity’s activities. Whilst this is an acceptable approach to managing your charity’s finances, having no reserves potentially creates a financial risk that could result in the charity being unable to operate effectively or even force it to close.
The reasons why you might need to keep reserves, or decide that your charity should not hold reserves, will be specific to your charity and its circumstances at any given time. Generally, reasons for keeping reserves will include:
i) to fund shortfalls in income
ii) to fund working capital
iii) to fund unexpected expenditure
iv) to fund a short term cash-flow deficit
v) to fund other known liabilities
vi) to engage with new opportunities as they arise
Whether or not your charity keeps reserves, setting a good reserves policy will give confidence to stakeholders that you are managing your charity’s finances properly. Working out your charity’s need for reserves will also help you to better understand your charity’s future funding needs and its overall financial well being.
Setting a Reserves Policy
The Charity Commission for England and Wales expects all charities to have a reserves policy. In it’s publication Charity reserves: building resilience (CC19), the Commission explains the importance of having a good reserves policy that tells existing and potential funders, donors, beneficiaries and other stakeholders why the charity is holding reserves (or not).
The factors that need to be taken into account when setting a reserves policy will vary according to the particular circumstances of your charity including its size, the complexity of its activities, and the type of funds it receives and holds. Whatever your charity’s circumstances, the factors that need to be considered will fall into four broad categories:
i) The nature of the funds that will be received and are currently held
ii) The reliability of future funding sources
iii) Future expenditure commitments and whether they can be met from the charity’s income
iv) Whether the charity has other assets that could be released instead of keeping reserves
There is no one prescriptive way to set a reserves policy and ultimately it will fall to the trustees’ judgement to decide how much should be kept. Taking a risk based approach will help you to understand the risks associated with your charity’s income streams and expenditure commitments and will help you to work out your charity’s needs for reserves based on financial risks.
Remember, setting a reserves policy is part of the trustees’ financial management and forward financial planning. Your reserves policy should be set at the same time as you prepare your financial strategy for the year ahead and beyond.
The Steps for Developing a Reserves Policy
Step 1: Understand your charity’s funds and what reserves you currently have
Step 2: Identify the risks associated with your charity’s income and expenditure
Step 3: Assess the reasons why your charity may (or may not) need to keep reserves
Step 4: Identify other funds or assets that could be used instead of keeping reserves
Step 5: Decide the amount or range of reserves that your charity needs to keep
Step 6: Write your reserves policy
Download Your FREE Reserves Calculator
Click on the image to access your FREE Reserves Calculator (requires MS Excel) along with instructions for completing.
Our unique Reserves Calculator will guide you through the steps required for setting a reserves policy using a risk based approach. It takes into account all the factors set out in the Charity Commission’s guidance and helps you to work out the amount or range of reserves needed for your charity. Use the information from the calculator to create your Reserves Policy to meet the specific needs of your charity. The Calculator can be updated as your charity’s financial circumstances change, so you can monitor your charity’s reserves and update your policy at any time.
Contact Us if you would like us to prepare a reserves policy on your behalf (see our price list for current price)