Charity Reserves Policy: A Practical Guide for Trustees

A charity reserves policy explains why your organisation keeps money available, how much it needs and when that money can be used. Done well, it helps trustees protect essential services—and helps funders understand why a charity with money in the bank may still need support.

The challenge is not choosing a convincing number of months. It is connecting your reserves to real risks, spending commitments and the needs of the people you serve. This guide explains how to calculate available reserves, set a defensible target and write a policy your trustees can actually use.

The regulatory guidance referenced here is the Charity Commission's Charity reserves: building resilience (CC19), which applies to England and Wales. Charities in Scotland and Northern Ireland should also check their own regulator's requirements. Examples are illustrative, not accounting or legal advice; take appropriate professional advice for your organisation's circumstances.

What are charity reserves?

In CC19, reserves are the part of a charity's unrestricted funds freely available to spend on any of its charitable purposes. They are not simply the bank balance, all the charity's funds or the surplus shown in a single year's accounts.

Start with unrestricted funds, then identify amounts that are not freely available. CC19 explains that exclusions include tangible fixed assets used to deliver the charity's activities, social investments, designated funds for essential future spending and commitments not already provided for as liabilities. The calculation must reflect your actual accounts and circumstances, not a generic subtraction formula.

Restricted funds are not free reserves

A grant restricted to a particular project does not become available for general emergencies just because it is sitting in your bank account. Restricted funds fall outside this definition of reserves. Their existence can nevertheless affect your risk assessment: a secure, restricted award may cover some services for a period, while leaving central costs or other activities exposed.

Designated funds need a clear explanation

Trustees may designate unrestricted funds for a particular purpose. That internal decision is different from a restriction imposed by a donor. Explain the reason, amount and intended timing of material designations, and review whether they remain justified. Do not use designations merely to make available reserves appear smaller in a funding application.

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Why funders ask about your reserves policy

Reserves help a funder understand financial resilience and funding need. A charity with very low available reserves may struggle if income is delayed or a major funding source ends. A charity with substantial unexplained reserves may leave a reviewer wondering why it cannot contribute more to the proposed work.

Neither question has a universal answer. Some charities have significant fixed commitments or support vulnerable beneficiaries who need continuity. Others have flexible costs and more predictable income. Your policy should explain these differences rather than claiming that having either high or low reserves automatically makes you fundable.

Always check the specific funder's criteria: a policy does not override an eligibility rule or guarantee an award. It should help communicate the financial reasoning behind your case for support, not disguise information a funder has asked to see.

Step 1: Calculate the reserves you actually hold

Ask your finance lead or accountant to reconcile the calculation with the latest accounts or management figures. Record the date, the unrestricted funds balance and each relevant adjustment. Avoid deducting a liability twice: if it is already reflected in the funds balance, subtracting it again will understate available reserves.

Illustrative calculation: not the same as cash

A charity has £90,000 of unrestricted funds. Within that balance are £30,000 of tangible fixed assets used for its services, £15,000 designated for essential future expenditure and £5,000 of other commitments not already provided for as liabilities. Assume there are no social investments or other relevant adjustments.

Its illustrative available reserves are £90,000 − £30,000 − £15,000 − £5,000 = £40,000. The calculation needs checking against the underlying records and the justification for each exclusion.

That £40,000 is not automatically cash available today. Debtors, payment timing and other balance-sheet items can affect liquidity. Prepare a cash-flow forecast alongside the reserves calculation.

Be especially careful where you have endowments, trading subsidiaries, property, social investments or complex pension commitments. Those circumstances may require a more detailed approach than the simple example above. Keep the method consistent between board reports, the trustees' annual report and funding applications, explaining genuine changes rather than presenting different figures without context.

Step 2: Identify what the reserves need to protect

Start with your delivery model and a realistic income forecast. Which services must continue if income falls? How quickly can you reduce spending responsibly? Which commitments would remain even if you stopped accepting new participants? Review the timing and reliability of income, not just its annual total.

Income risk: dependence on one funder, uncertain renewals, seasonal donations or contracts paid in arrears.
Spending commitments: payroll, leases, notice periods, supplier obligations and costs that cannot be reduced quickly.
Continuity: time needed to adapt services, support vulnerable beneficiaries or transfer delivery safely.
Unexpected costs: plausible repairs, equipment failure or other risks not covered by insurance or existing budgets.
Orderly closure: obligations and practical steps if the organisation cannot continue, with appropriate advice.

Distinguish a temporary payment delay from a permanent income loss. A delay might need a short-term cash buffer; losing a large award could require service redesign or closure planning. A reserves policy should not suggest that a finite pot can solve an ongoing structural deficit.

Use scenarios, such as a major award ending or a payment arriving late, and estimate the resulting shortfall. Where risks overlap, avoid counting the same salary or lease payment twice. Where an insurance policy or confirmed income genuinely reduces exposure, document why.

Step 3: Set a justified target or range

CC19 states that there is no single level or range of reserves that is right for all charities. “Three to six months” may be a starting point for a discussion, but it is not a universal regulatory requirement. Your target should follow from your risks and forecasts, not from a phrase copied from another charity's annual report.

Illustrative target: explain the assumptions

Trustees assess that essential spending exposed to income interruption is £12,000 a month. Their scenario requires three to four months to adapt delivery responsibly. They also identify £6,000 of distinct one-off obligations not included in that monthly spending and not already deducted from available reserves.

The scenario produces £12,000 × 3 + £6,000 = £42,000 at the lower end, and £12,000 × 4 + £6,000 = £54,000 at the upper end. This is an example of explaining a range—not a recommended target for every charity.

With £40,000 of available reserves, the example charity is £2,000 below the lower target. Trustees should explain the shortfall, interim risk controls and a realistic replenishment plan rather than claiming that the target has already been achieved.

If you express your target in months, define the spending base. Does it include all annual expenditure, essential unrestricted costs or another justified measure? Explain which restricted activity is excluded and why. A target figure or range should be understandable to someone who has not built the spreadsheet.

Step 4: Write a policy with decisions and responsibilities

The finished policy can be concise, but it should be specific enough to guide action. Include these headings and replace generic statements with your charity's actual reasoning.

Purpose: why reserves are needed, linked to beneficiaries, continuity and financial risks.
Definition and calculation: what counts as available reserves and the basis for exclusions.
Target: the amount or range, supporting assumptions and how it relates to spending and forecasts.
Current position: available reserves at a stated date, compared with the target.
Use and approval: circumstances for drawing on reserves and the approval process under your governance arrangements.
Action plan: what happens if reserves are below or above the target, including timescales and ownership.
Monitoring and review: who reports the position, how often it is reviewed and what triggers an earlier reassessment.

Example wording to adapt—not adopt unchanged

“Trustees aim to maintain available unrestricted reserves within a range supported by the charity's income-risk assessment and essential spending commitments. Reserves may be used to maintain essential services during a temporary income interruption and to meet identified unexpected obligations, subject to the agreed approval process.”

“The finance lead reports available reserves and cash-flow forecasts to trustees at the agreed reporting intervals. Where reserves fall outside the target range, trustees record the reasons and approve appropriate action. The policy is reviewed at least annually and sooner if major funding, spending or service risks change.”

Add your actual target, calculation, reporting frequency and approval responsibilities. Trustees should discuss and approve the policy and record the decision. A document downloaded into a folder but never used in financial planning provides little protection.

Step 5: Plan for reserves below or above target

If reserves are below target

Explain the reason and assess whether the shortfall is temporary or persistent. Possible actions include seeking unrestricted income, agreeing realistic contributions to shared costs, phasing new work or reducing commitments responsibly. Set an achievable plan rather than assuming next year's fundraising will close the gap.

Grants restricted to delivery cannot automatically be diverted into general reserves. Check award terms and take advice where necessary. Our guides to securing core funding and costing a grant budget properly can help identify genuine funding needs without hiding them inside unrelated project lines.

If reserves are above target

Ask why. An unusual receipt, delayed project or changing risk profile may explain the position. Review whether the target is still appropriate and whether excess resources could responsibly support your charitable purposes. Record the intended use and timescale; do not increase the target solely to justify holding money without a clear reason.

Reserves are not an end in themselves. They should help the charity deliver its purposes while managing risk—not unnecessarily prevent resources from reaching beneficiaries.

Step 6: Monitor and explain the position

CC19 recommends reviewing the policy at least annually and monitoring reserves during the year. Match your reporting frequency to the charity's risks. A major award ending, a new lease or a material change in services may justify an earlier review.

Report both available reserves and liquidity. A charity can meet an accounting reserves target and still have difficulty paying bills if income arrives late. Show the latest cash-flow forecast, significant changes and actions needed alongside the policy comparison.

Explain the policy and reserves position in the trustees' annual report in line with the applicable reporting requirements. In funding applications, distinguish restricted funds, justified designations and genuinely available reserves. Use your funding strategy to connect financial resilience with the work you intend to deliver.

Frequently asked questions about charity reserves policies

How many months of reserves should a charity hold?

There is no universal required number. Assess your income reliability, essential costs, commitments and the consequences of interrupted services. Explain the target and spending base; do not treat a generic three- or six-month figure as a regulatory rule.

Can a charity apply for grants if it has reserves?

Potentially, depending on the funder's criteria. Explain what is freely available, what risks the reserves cover and why the proposed work still needs funding. Holding reserves neither guarantees nor automatically prevents an award.

Is a separate bank account required for reserves?

A separate account does not define free reserves. Your records, fund classifications and commitments determine what is available. Banking arrangements should reflect your controls, access needs and governing or funding terms; seek advice for your circumstances.

What if the charity has no reserves?

Explain the position, risks and the plan to address them. A charity unable to reach its target still needs a considered approach. A deliberate zero-reserves policy requires a defensible explanation and workable alternatives for managing the risks—not simply the assertion that all income should be spent immediately.

Does this guidance apply to a CIC?

The financial-planning principles may be useful, but CC19 is charity guidance, not a substitute for a CIC's company-law duties or reporting requirements. Use the correct legal framework and obtain appropriate advice for your organisation.

Make the policy explain your decisions

A credible charity reserves policy connects the available money, the risks and the action trustees will take. Calculate the position carefully, build a target from realistic scenarios and explain how the policy protects beneficiaries without unnecessarily withholding resources from your charitable work.