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.
Reserves are funds that are freely available to spend on any of the charity’s purposes. They need to be:
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.
As charities, we want to spend money on our aims. Having a reserves policy promotes:
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:
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).
It can be helpful to think through different scenarios to come up with a range of target reserves levels:
You can calculate reserves levels as follows:
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.
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.
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:
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:
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.
NCVO worked with Rachel Cooper at Welbeck Accountancy to create this guidance.
Last reviewed: 01 December 2022
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