Creating a Reserves Policy

Why might you need reserves for the charity to be effective?

The basis of a good reserves policy is to think through why some funds may need to be held back as a reserve. For a small charity with a simple structure and uncomplicated activities reasons may include:

• Risk of unforeseen emergency
• Covering unforeseen day-to-day operational costs
• A source of regular income not being renewed
• Planned commitments that cannot be met by future income
• Need to fund a short-term deficit in a cash budget

If after considering the above reserves are not needed, this must be explained in the charity’s annual report.

How much do you need in a reserve?

The reserves level may be a target amount or can be a range. To identify the amount needed consider:

• Risk and how much may be needed for a contingency
• Look at expenditure budget – is a contingency fund needed to meet unforeseen operational costs
• If there are uncertainties over income, reserves may need to equal a level of income
• Specific sums needed for a planned spending commitment

Have you got any funds in reserve at the end of the year?

A comparison is needed between reserves needed and reserves held.

• Calculate the amount of reserves
• State the amount of reserves held and compare with the target level of reserves or range set
• Explain any shortfall or excess in reserves against target set
• Explain action being taken or planned to bring reserves in line with target

Information about the reserves policy and level of reserves held must be included in the trustee’s annual report.