I couldn’t conclude this series without talking about charitable reserves and their importance. Unfortunately, we are at operating in an environment where many charitable organisations are having to use their reserves to keep the doors open and services going. This is not only unsustainable in most cases, but ultimately puts the organisation, and its people, in a vulnerable position should the worst happen.
What are reserves?
Well, as the title of this piece goes – the clue is in the name. They are part of an organisation’s financial assets, unrestricted, and are held ‘in reserve’ to be used for what the organisation needs to continue delivering their charitable purpose.
Charities use them for a variety of things – for example, to support effective closure, to bridge cashflow, emergency spends, large one-off payments – i.e. something unexpected like a new boiler, or to invest in a new project short term or cover a funding cut while new funding is sought. But organisations must remember they are hard to build up and what takes a few days to spend, can take years to recoup – as such, an early warning sign of financial difficulties can be use of reserves to cover revenue expenditure against an income deficit without a plan for how this will stop and be replaced if necessary.
If the organisation does have reserves – it should also have a reserves policy which sets out how you intend to build them, what level of funds you are aiming for, what is designated to specific things (designated funds), and how expenditure will be agreed and signed off by the board.
Can they be too high? The level of reserves an organisation holds will depend on different factors (size, assets, income streams, number of employees, to name a few) and charity law is clear that charitable income should not be held for too long and that trustees must be able to justify their reserves position. This is not only important for legal reasons – holding high levels of reserves can also concern funders/donors making an award to the organisation if they think funds are not needed. As the Charity Commission says, “A good reserves policy gives confidence to stakeholders that the charity’s finances are being properly managed and will also provide an indicator of future funding needs and its overall resilience.” (CC19: Charity reserves: Building Resilience: Charity Commission)
In addition, with changes to the Charities Statement of Recommended Practice (SORP) in January 2026, reserves now feature much more prominently in statutory reporting with clear direction to disclose reserves, future plans and connections between organisation impact and finance.
There are a few key questions organisations should be asking of themselves:
- Do we hold reserves, and if so, is our policy up to date and meaningful?
- How much do we need? Is our reserves level justified? 3 months operating costs has long been the figure organisations aspire to – but this is an old ‘rule of thumb’ and in today’s climate unlikely to be meaningful when equated to the need of the organisation. Dig into this further and most will find 3 months inadequate to cover closure costs, let alone build resilience.
- What is happening to our reserves? Are we spending them and if so, are we doing so with purpose and a clear strategy to replace if needed?
- And, while very difficult at the moment, does our reserves policy AND actual financial level, afford us the resource to do what is needed to make sure our people (those who work for us, volunteer with us, and use our services) are treated fairly in difficult times? After all, they are the lifeblood of our organisations and deserve to be confident that they will be…
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This is the final blog in a 6-part series on challenge and crisis – do get in touch if there are other themes you would like to see either as a standalone topic or as part of a themed series.
Hannah
