Reserves, and how much is too much
How to work out your free reserves, decide what level is right for you, and write a policy the board and your funders both accept.
Reserves are the unrestricted funds you could spend if you had to. Not your total assets, not your restricted grants, and not the building. What is actually available.
Why you need a policy
Because the Commission expects one, funders ask for it, and without it you will be criticised for holding too much and for holding too little, sometimes in the same year. A policy turns the level into a decision the board took rather than an accident.
Working out the number
- Start with total funds, then take out restricted funds, endowment, and anything designated for a specific purpose the board has genuinely committed to.
- Take out the value of fixed assets you could not sell without stopping what you do.
- What is left is your free reserves.
- Now work out what you would need: the cost of an orderly wind-down if income stopped, plus a buffer for the risks you can actually name.
How much is right
There is no correct figure and anyone who gives you one without asking about your income has not thought about it. Three to six months of running costs is the range most small charities land on. What matters more than the number is the reasoning: a charity with one funder on a rolling annual grant needs far more cover than one with a diverse, predictable income.
What a policy has to say
- Why you hold reserves, in terms of the risks specific to you.
- The target level or range, and how you calculated it.
- What you will do if you go above or below it, and by when.
- When the board will review it. Annually, and after anything significant changes.
It goes in your trustees' annual report. If your reserves sit outside your own stated range, say so and say what you are doing about it. A policy that has quietly been ignored for three years is worse than not having one.