Introduction
A charity’s reserves policy is one of the most important financial governance documents trustees should maintain. It helps ensure the charity has sufficient financial resilience to continue delivering its services, manage unexpected events and remain financially sustainable.
Many charities hold reserves without clearly understanding why they exist, while others operate with insufficient reserves, leaving them vulnerable to funding shortages, rising costs or unforeseen emergencies. A well-considered reserves policy helps trustees strike the right balance.
At ATS Accountants, we support charities across Oldham, Rochdale, Greater Manchester and St Helens with charity accounts, independent examinations, governance support and trustee training, including guidance on developing practical and proportionate reserves policies. You can read more about ATS’ work with charities here – Charity Accountants | ATS Accountants.
What Is a Charity Reserves Policy?
A reserves policy explains:
- Why the charity holds reserves
- The level of reserves considered appropriate
- How the reserves target was determined
- How trustees monitor reserves
- What actions will be taken if reserves fall above or below target levels
It should be approved by the trustee board and reviewed regularly as part of the charity’s financial governance framework. Here’s a bit more on developing and reporting on charity reserves policy from the Charity Commission – Charity reserves: building resilience (CC19) – GOV.UK.
Why Is a Reserves Policy Important?
A reserves policy helps trustees:
Protect Service Delivery – Reserves can provide financial stability if income unexpectedly falls or expenditure increases.
Support Good Governance – Trustees are expected to plan for the sustainability of their charity rather than simply reacting to financial problems when they arise.
Assist Financial Decision-Making – Understanding reserve levels helps trustees make informed decisions about:
- Expansion plans
- Recruitment
- New projects
- Funding applications
- Risk management
Demonstrate Accountability – Funders, regulators and stakeholders often expect charities to explain both their reserve levels and the rationale behind them.
Who Is Responsible for the Reserves Policy?
The ultimate responsibility sits with the board of trustees.
While finance staff, treasurers or accountants may assist in preparing calculations and recommendations, trustees must:
- Approve the reserves policy
- Understand the assumptions used
- Review reserve levels regularly
- Challenge whether current reserves remain appropriate
This links closely to the trustee duties discussed in our article Trustee Financial Responsibilities Explained.
How Much Should a Charity Hold in Reserves?
There is no single correct answer.
The appropriate level depends on factors such as:
- Size of the charity
- Financial stability
- Income sources
- Dependence on grants
- Staffing commitments
- Contractual obligations
- Level of financial risk
A charity with secure long-term funding may require lower reserves than an organisation heavily dependent on annual fundraising or grant income.
Trustees should avoid adopting arbitrary targets such as “three months’ expenditure” without considering their specific circumstances.
A Practical Approach to Calculating Reserves
A common methodology is to assess:
Essential Running Costs
Calculate the charity’s unavoidable expenditure, such as:
- Payroll costs
- Rent and utilities
- Insurance
- Governance costs
- IT systems and subscriptions
Financial Risks
Consider:
- Potential grant losses
- Contract renewals
- Economic uncertainty
- Cash flow fluctuations
- Unexpected expenditure
Recovery Period
Estimate how long it may take to replace lost income or implement cost-saving measures.
The reserves requirement should then reflect the charity’s ability to continue operating during that period.
Common Trustee Mistakes
Some of the most common issues encountered during independent examinations and governance reviews include:
No Formal Policy – Many charities have reserves but no documented explanation for why they are held.
Treating Restricted Funds as Reserves – Restricted funds are not normally available for general operating purposes and should not automatically be included in reserve calculations.
Failing to Review the Policy – A policy prepared several years ago may no longer reflect the charity’s circumstances.
Chasing Large Reserves Without Purpose – Excessive reserves can sometimes raise questions from funders or stakeholders if trustees cannot clearly explain why funds are being accumulated.
Ignoring Low Reserve Levels – Operating continuously with minimal unrestricted reserves can increase financial vulnerability.
Dangers of Having Insufficient Reserves
Low reserves can expose a charity to:
- Cash flow difficulties
- Delayed project delivery
- Staffing challenges
- Inability to respond to emergencies
- Increased financial stress on trustees
- Greater risk of financial distress
For some charities, the loss of a key grant or contract could create immediate operational difficulties if reserves are inadequate.
How Often Should the Policy Be Reviewed?
As a minimum, trustees should review the reserves policy:
- Annually
- When approving budgets
- Following major funding changes
- After significant organisational growth
- Following major strategic decisions
Many charities include reserves as a standing agenda item within regular board finance reports.
Key Questions Trustees Should Ask
When reviewing reserves, trustees should consider:
- Do our reserves still reflect current risks?
- What proportion of our funds are genuinely unrestricted?
- Have our income sources changed?
- Could we continue operating if a major funder withdrew support?
- Are our reserves sufficient but not excessive?
Regular discussion helps ensure reserves remain aligned to the charity’s long-term objectives.
Conclusion
A charity reserves policy is far more than a compliance document. It is a key tool for financial sustainability, risk management and good governance.
Trustees should ensure their reserves policy is clearly documented, evidence-based and reviewed regularly. The right level of reserves can help a charity navigate uncertainty, protect beneficiaries and continue delivering its charitable objectives with confidence.
For charities in Oldham, Rochdale, Greater Manchester and St Helens seeking support with governance, independent examinations, charity accounts or financial oversight, professional advice can help trustees develop a reserves policy that is proportionate, practical and aligned with their specific circumstances.
Author Bio
Shahed Alam BSc (Hons) FCPFA is a Director of ATS Accountants and a specialist in charity finance, governance and compliance. Having advised and audited charities ranging from community organisations to larger charitable groups, he helps trustees strengthen financial oversight, improve governance and meet their regulatory responsibilities. ATS Accountants supports charities across Rochdale, Oldham, Greater Manchester, St Helens and London.