How much do you need in charity reserves?
Charity reserves are funds which can be freely spent on any of your charitable purposes. Reserves can be really useful to help you budget for unforeseen emergencies, unexpected bills or other short-term deficits. They can even help you through difficult periods like the coronavirus pandemic.
But how much should you have in your charity reserves pot? The short answer is: it depends. There is no blanket rule and the amount you should have in reserves will vary depending on your charity’s needs.
Our tips below will help you understand why your charity should have reserves and how much you may want to have in the bank.
Create a reserves policy
All charities should have a reserves policy, no matter how big or small your reserves will be. In some exceptional circumstances, you may decide to hold no reserves at all – but you still need a reserves policy to explain why this is.
A good reserves policy can help you show donors, funders and beneficiaries how you are managing the charity’s money and how you are ensuring the charity remains financially sustainable.
Your reserves policy should explain exactly how much you plan to hold and why. This will help you to:
- Show how the trustees are managing the organisation’s money and help funders identify where funding gaps may be
- Manage your resources better and plan ahead to ensure your charity remains effective and sustainable
- Show how you are using your funds to meet your charitable aims and reassure the public you are not ‘hoarding’ money unnecessarily
When it comes to creating your reserves policy, there’s no ‘one size fits all’ approach. The policy should be specific to your charity and should take into account how much money you may require to remain resilient and flexible in the future.
For more information about what your reserves policy should include, take a look at our Charity Reserves Factsheet.
Should you have three months’ worth of reserves?
There’s a common misconception that OSCR suggest you should have a minimum of three months’ worth of reserves to cover your running costs. This isn’t true – there’s no specific amount we would suggest you have in reserves.
Different charities need different levels of reserves. While three months’ reserves may be appropriate for some charities, others may need more or less than this.
It’s also untrue that OSCR objects to charities who hold very large levels of reserves. As long as this is appropriate for the charity and the reserves policy sets out why this level of funds is necessary, a large reserves fund can be appropriate in some circumstances.
How do I know how much I need in charity reserves?
Although there’s no specific answer to this question, there are several things you can consider to help you decide what level of reserves is appropriate for you.
Start by thinking about the reasons you might need reserves and the amount you would need for each reason, as well as the likelihood of these events happening. Also consider:
- Are you planning for unforeseen emergencies or day-to-day operating costs?
- How would the charity’s beneficiaries be affected by a sudden loss of funding or service?
- Is there uncertainty over future income and do you need to allow for any gaps in funding?
- Has a specific future cost been identified which you may need to begin budgeting for, such as an improvement to facilities or the launch of a new service or project?
Budgeting for reserves should be part of your strategic planning process. It’s important to think about your funding streams and how you frame applications – some charities get into difficulties as they have plenty restricted funding but not enough unrestricted, meaning they can’t hold reserves properly.
The role of trustees
Reserves policies and planning are an important part of charity governance. It’s really important that your reserves policy is fully understood by all trustees so they can exercise their duties appropriately.
Trustees should consider the level of reserves actually held and how this fits with the policy. Be aware of reserves going up or down unexpectedly, and consider whether this is because of a short-term situation or a long-term issue that may need addressed.
The policy itself should be regularly reviewed to make sure it remains up-to-date and any necessary amendments are made if your financial position or activities change.
Don’t forget to explain your reserves policy in your Trustees’ Annual Report as this will help to make it clear to funders what your position is and any gaps they may be able to fill.
To find out more about charity reserves, take a look at these helpful resources: