A reserves policy will be very specific to your charity. All charities have different funding streams and activities so the amount of money you need to hold in reserves will probably be different to other charities. It is important that you carefully consider the level of reserves your charity needs.
To understand why you might need reserves you first need to understand your charity’s financial position and how this links with your charity’s activities. Budgets and future plans need to be considered, in particular any uncertainty over future income or the risk of unexpected expenditure. When you review your future plans you should consider whether expenses can be met from annual income or whether reserves may be needed to meet costs.
Particular areas to consider are:
You need to think about the reasons you might need reserves and the amount you would need for each reason. It might not be practical to consider holding reserves for all eventualities, so you need to consider the likelihood of events happening, as well as how much money it could cost.
Things to consider are:
The reasons why you need reserves will determine the amount of reserves and how this is reflected. In some cases reserves will be a specific amount; in others it may reflect a number of months or weeks expenditure which could fluctuate.
It is important to recognise that there is no formula or one size fits all approach to reserves and you need to consider what is relevant for your charity.
How much you need may vary. If one year you have a specific project planned you may need a higher level of reserves that you won’t need the next year. You should review the level required regularly to make sure it is still fit for purpose.