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Reserves policy

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Use this page to understand what reserves are, why you need to set reserve levels and what to consider when working out your organisation's reserves.

Defining reserves

Reserves are funds that are freely available to spend on any of the charity’s purposes. They need to be:

  • unrestricted – funds that the charity trustees are able to use for any of the charity’s purposes.
  • cash (or things easily converted to cash, like debtors) – not long-term assets like buildings that you use in your work.
  • not designated funds – funds not formally set aside by your trustees for a specific purpose.

Reserves are about providing a buffer against uneven and unpredictable income or spending. This will help you to plan for the future, as it gives you time to take action intentionally.

They’re too often seen as money you can’t use. They’re seen as a ‘rainy day’ savings fund for an emergency which accountants want to hold onto, and operational staff want to spend.

Reserves are your bridge to the future, enabling your social impact for years to come. 

Read the Charity Commission guidance for a detailed definition of reserves.

Why your charity needs a reserves policy

As charities, we want to spend money on our aims. Having a reserves policy promotes:

  • resilience – as part of the internal financial management, informing planning and linking into risk management.
  • confidence – showing funders and others that you're actively managing your finances and being intentional about what unspent funds you're holding. This gives funders an understanding of why you need funding for a particular activity and gives assurance to creditors.
  • compliance – trustees are required by the Charity Commission to include their reserves policy in their annual report or state that they don’t have one. If your organisation does have one, you're expected to develop, implement and monitor your reserves policy following the guidance in CC19 Charity reserves: building resilience.

Reserves levels and your reserves policy

Here’s a four-step process that you and your trustees should go through when you complete your management accounts to monitor and maintain your reserves levels:

  • Set the reserves policy (annually)
  • Find out your current reserves level (A)
  • Find out your target reserves range (to fit with your reserves policy) (B)
  • Consider actions to go from A to B

Set the reserves policy (annually)

You can either spend your money on your cause or keep it to use as protection for your organisation in future. This tension makes it difficult to find the right level of reserves.

It can be useful to break down the categories of use and ask some questions to help make this decision.

It’s important to look at how predictable your income is along with how fixed your costs are.

For example, a charity with high fixed costs and unpredictable income is likely to need higher reserves than an organisation with a flexible cost base and high levels of annual income secured.

Take a look at Sayer Vincent’s helpful diagram below – from page 14 of the guide Reserves policies made simple (PDF, 549KB).

Sayer Vincent's diagram of understanding your charity position when looking at unpredictability of income against fixed or flexible nature of costs
Sayer Vincent's diagram showing your charities position when looking at the unpredictability of income against the fixed/flexible nature of costs

It can be helpful to think through different scenarios to come up with a range of target reserves levels:

  • A minimum level of reserves that would allow you to close down in a controlled and responsible way.
  • A level that would keep the mission-critical work on the road.
  • The level required to support the strategic plan effectively.

Find out your current reserves level (A)

You can calculate reserves levels as follows:

  1. In your statutory accounts – find your most recent balance sheet/statement of assets and liabilities.
  2. Find the unrestricted funds figure.
  3. For all accounts deduct designated funds, programme-related investments, and other commitments not already accounted for (in practice you may not have any of these).
  4. If you prepare accruals accounts deduct the fixed assets figure (if you have a balance sheet in your accounts they are accruals accounts).
  5. Adjust for your current position – any unrestricted surplus or deficit since the beginning of the financial year.

Find out your target reserves range (to fit with your reserves policy) (B)

Having created your scenarios within your reserves policy, you‘ll need to put numbers to these.

It’s very unlikely that you’ll arrive at a single figure because of the uncertainty. It’ll be more realistic to say you need reserves between £X and £Y.

Consider actions to go from A to B

You’re expected to monitor reserve levels throughout the year. It may be that once you’ve completed the calculation above, your actual (A) reserves are outside your target range (B).

Trustees should then consider whether this is a short-term situation or a longer-term issue. If it’s a longer-term issue, you then have to take action.

  • A greater than B – a nice problem to have, it gives you some flexibility to review and invest intentionally in your programmes to bring your reserves to the level you think is appropriate.
  • B greater than A – this is tough with less funding available everywhere, and no one’s keen to see their money being put into building reserves.
    • If it’s a relatively small difference, you need to make an active plan to build reserves over a specific period and make sure it happens. When it gets really hard, you have to remind yourselves it’s for your future ability to support those you seek to serve.
    • If it’s a large difference or your current reserves are close to what you’ve identified for an orderly closedown, you may need to take advice. For more information about this, read our guidance on financial difficulties.

Reserves in your annual report

You have to include a statement on your reserves policy in your annual report (or a statement that you don’t have a reserves policy).

For all charities, this has to include:

  • the level of reserves your charity has
  • why they are held.

You also have to explain the purpose of any significant designated funds and when you expect to spend them.

Larger charities with an income of over £500,000 are expected to provide more information in their review of reserves in the annual report. You should:

1) Give amounts at the end of the reporting period which show:

  • A – the total funds held – combining restricted and unrestricted
  • B – restricted funds
  • C – significant funds that are designated or otherwise committed with an explanation as to why, and the likely timing of expenditure on these funds
  • D – funds that are tied up in tangible fixed assets or investments related to programmes
  • E – the reserves the charity holds (A-B-C-D)

2) Say what your reserves figure should be based on your reserves policy, and compare that with the actual reserves figure (E). If your current reserves are less than what they should be, explain what steps you’re taking to put that right.

Further help and guidance

NCVO worked with Rachel Cooper at Welbeck Accountancy to create this guidance.

Last reviewed: 01 December 2022

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This page was last reviewed for accuracy on 01 December 2022

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