In an increasingly uncertain financial climate, charities face growing pressure to remain resilient while continuing to deliver on their core missions. In our latest blog, Michael Jones discusses one of the most important, yet often misunderstood tools at charities' disposal: financial reserves.
Charity reserves are the part of a charity’s unrestricted funds that are freely available to spend on any of the charity’s purposes, often referred to as ‘free reserves’. These reserves are a critical component of sound financial planning and risk management. Maintaining adequate financial reserves provides a vital buffer against uncertainty and helps ensure that a charity can continue to meet its objectives during periods of financial difficulty.
Understanding Charity Reserves
Beyond basic financial security, reserves help charities manage financial risks by providing the resources needed to maintain operations during unexpected events, such as urgent building repairs, sudden increases in service demand, or declines in donations, grants, or trading income. They also ensure continuity of services in times of crisis or transition by allowing the charity to continue supporting beneficiaries while alternative funding or operational plans are put in place. In addition, financial reserves support long-term objectives by enabling charities to invest in innovation, expand services, or implement strategic plans without having to rely immediately on new sources of funding.
Reserves policy
Trustees are responsible for setting and monitoring a reserves policy. This includes deciding whether to hold reserves, determining an appropriate level, and ensuring that the policy reflects the charity’s risks, needs, and financial strategy.
Trustees should consider the charity’s particular circumstances when deciding on reserves. There is no standard level. Holding excessive reserves may indicate that funds are not being used effectively, while too little may threaten the charity’s viability.
A reasonable reserves policy should:
- Justify why reserves are being held (or not held)
- Plan for the continued delivery of essential services
- Reflect financial forecasts, spending commitments, and the risk of unplanned closure
- Be published and clearly communicated to funders and stakeholders
Reserves Acknowledged in Annual Reports
Importantly, charities that adopt a zero-reserves approach must explain this decision in their annual report, acknowledging the financial risks involved and how they intend to mitigate them. All charities must include in their annual report their policy on reserves, stating the level of reserves held and the reasons for holding them. Where material funds have been designated, the reserves policy statement should quantify and explain the purposes of these designations and, where set aside for future expenditure, the likely timing of the expenditure.
Best Practices for Larger Charities
Larger charities are encouraged to include additional information in their review of the charity’s reserves, including stating the total amount of funds held at the end of the reporting period and identifying any funds that are restricted and not available for general use. Where funds can only be realised by disposing of tangible fixed assets, this should be made clear. Finally, charities should compare the level of reserves held with their reserves policy and, where appropriate, explain the steps being taken to align reserves with the level considered suitable for their future plans.
The Importance of Transparency
Regulatory requirements also make transparency essential. A lack of reserves increases the risk of service interruptions or even sudden closures. Conversely, holding excessive reserves without justification can damage benefactors’ confidence and lead to scrutiny. In either case, clear communication and proper planning are essential. Trustees should continually assess whether reserve levels are appropriate and ensure they reflect the charity’s strategy and future activities.
Final Thoughts
Building and maintaining financial reserves isn’t about hoarding funds; it’s about enabling stability, sustainability, and growth. A strong reserves policy signals good governance, reassures stakeholders, and prepares charities for the unexpected.
If your charity would like support reviewing or developing a reserves policy, or needs guidance on financial planning and reporting, our team at Bevan Buckland is here to help. Get in touch today to speak to one of our charity specialists by emailing us at mail@bevanbuckland.co.uk or calling 01792 410100.
