The Definitive Guide to
Reserves Policy for
Charity Trustees
Nearly 40% of UK charities have less than three months of reserves saved — leaving them dangerously exposed. Here's everything trustees need to know to build a reserves policy that protects your mission.
of UK charities hold less than 3 months of operating reserves
What Actually Are Reserves?
In plain terms, reserves are the funds your charity has genuinely available to spend — not locked away in a building, tied up in a contractual commitment, or restricted by funder conditions. They're freely deployable by your board, within your charitable purposes.
Think of your charity's reserves like a household emergency fund. You wouldn't spend every penny that comes through the door. You'd keep something back for when the boiler breaks or unexpected costs arise. Your charity needs exactly the same safety net — but the rules around how much you can keep and what counts are more nuanced than most trustees realise.
“Not all money sitting in your bank account counts as reserves. Some of it might be earmarked for specific projects, or have conditions attached by funders — understanding this distinction is foundational.”
The Three Types of Charity Funds
Unrestricted Funds
Your most flexible money. Unrestricted funds can be spent on any charitable activity that fits your purposes — no strings attached. This is what gives your charity genuine financial stability.
Sources include general donations, trading income, investment returns, and event proceeds where donors didn't specify use.
Typical Unrestricted Fund Sources
Illustrative distribution for mid-sized UK charity
How Much Should Your Charity Hold in Reserves?
This is the question that causes the most anxiety among trustees — and the answer may surprise you. There is no legal maximum on how much reserves a charity can hold. The Charity Commission doesn't impose a cap. But you do need to justify whatever level you're holding, and that justification must appear in your annual accounts.
Many charities target between three and six months of regular operating costs. But this is a starting point, not a rule. Your specific risk profile determines the right number for your organisation.
Reserves Adequacy Scale
Illustrative benchmarks — your target depends on your specific risk profile
Reserves Target Calculator
Estimate Your Reserves Target
Enter your monthly costs and risk profile to calculate your target range
Estimated Target Range
£65,000 – £95,000
Effective reserves planning requires trustees to assess both income risk and operational obligations.
Five Risk Factors That Determine Your Target
There's no universal formula for the right reserves level — it depends entirely on your organisation's risk profile. These five factors should drive your assessment.
Reliance on a small number of large grants dramatically increases the risk of sudden shortfall.
Staff notice periods, lease commitments, and long-term service contracts create obligations you must honour.
Capital project, equipment replacement, or major programme launch need to be factored into your target.
Can your charity quickly scale down if funding dries up? Flexible costs need less reserves.
If you own a building or significant assets, you may need higher reserves for maintenance and lifecycle.
Mistakes Trustees Must Avoid
Many organisations run into serious difficulties not because they lack reserves, but because they misunderstand or mismanage them.
Confusing Reserves with Cash
Your reserves figure is not what's in your bank account. Some cash is restricted. Some reserves may be in investments. Always distinguish between the two.
Ignoring the Policy Until Audit
A reserves policy written three years ago and never revisited is worse than useless — it gives false assurance. Review at every AGM.
Setting an Unrealistic Target
Targeting twelve months when you're at zero creates a policy that's aspirational but meaningless. Set a credible, staged target.
Poor Documentation of Decisions
When you designate funds, adjust your target, or spend from reserves — record the reasoning in board minutes. You need a clear audit trail.
Separate Your Fund Analysis
Maintain a clear breakdown of restricted, unrestricted, and designated funds. Your management accounts should show the position by fund.
Build in Staged Milestones
If reserves are low, set interim targets — e.g. reach one month within 12 months. Board-approved milestones make the plan actionable.
Reviewing your reserves policy should be a standing item on every board agenda — not just an annual exercise.
Getting Started — A 4-Step Process
Building or refreshing your reserves policy doesn't need to be complex. Follow these four steps in sequence.
Pull your latest management accounts and separate every fund into its category: restricted, designated, and genuinely free unrestricted reserves. If you can't do this cleanly, your accounting system needs attention first.
Work through each of the five risk factors as a board. How volatile is your income? What contractual obligations could you be left with? How quickly could you scale down? The answers will shape your target range.
Choose a target that's genuinely achievable. If you're starting from zero, don't set a policy that says 'we aim to hold six months' with no pathway. Set a three-year plan with annual milestones.
Your written policy needs three things: your target level (and how you calculated it), how you'll monitor progress, and under what circumstances you'd draw on reserves. The Charity Commission's CC19 is free online and worth reading before you draft.
Moracle for Charities
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Charity Commission-compliant reserves policy?
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It depends entirely on whether the grant is restricted or unrestricted. If the funder specified how the money must be spent, it's restricted — it does not count as reserves. If they gave it for general charitable purposes without conditions, it's unrestricted and does count. Always check your funding agreement.
Almost certainly yes. Income concentration is one of the highest-risk factors. If either of those funders walked away, you'd face a potentially existential shortfall. Higher reserves give you breathing room. Document this risk reasoning explicitly in your reserves policy.
Yes — reserves don't have to be cash in the bank. Many charities invest a portion to generate returns. Ensure investments are appropriate for your risk appetite, accessible within a reasonable timeframe, and governed by a proper investment policy. Keep some portion in liquid accounts for genuine emergency needs.
Completely normal. Your reserves policy should acknowledge the current position honestly and set out a realistic, staged plan for building reserves over time. Having no reserves with a clear, board-approved plan is very different from having no reserves and no awareness of the problem.
Absolutely yes. Your policy should explain why deliberately low reserves are appropriate for your operating model. Having low reserves with documented justification demonstrates good governance. Having low reserves because you haven't thought about it is a red flag.
Any remaining unrestricted reserves must be transferred to other charities with similar purposes — they cannot be distributed to trustees, staff, or members. Restricted funds should be returned to funders or transferred for the originally intended purpose. This must be documented and reported to the Charity Commission.
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