Charity Reserves Policy: Template & Guide for UK Trustees
How to write a charity reserves policy. Includes a free template, calculation methods, and guidance on how much your charity should hold in reserves.
A reserves policy is one of the most important governance documents a charity can have — and one of the most commonly missing. Here's how to write one that satisfies trustees, funders, and the Charity Commission.
What is a Reserves Policy?
A reserves policy sets out how much money your charity intends to hold in reserve (unrestricted funds not committed to specific purposes) and why. It answers two critical questions:
- How much reserve do we need? — enough to cover liabilities and protect against income shocks
- What will we do if reserves are too high or too low? — action plans for both scenarios
Why You Need One
- The Charity Commission expects it — charities with income over £500K must explain their reserves policy in the trustees' annual report
- Funders ask for it — grant-making trusts and institutional funders often require a reserves policy
- Trustees need it — without a policy, trustees can't make informed financial decisions
- It protects the charity — too little reserve and you can't survive a funding gap; too much and you're hoarding money that should be working for your mission
How Much Should You Hold?
There's no single right answer. Common benchmarks:
| Approach | Typical Range | Best For |
|---|---|---|
| Months of expenditure | 3-6 months | Most charities |
| Risk-based calculation | Varies | Larger charities with complex risks |
| Fixed amount | Specific £ figure | Small charities with predictable costs |
The Months Method
The simplest approach:
- Calculate your average monthly expenditure
- Multiply by 3-6 months
- This is your target reserve
Example: Monthly expenditure = £5,000. Target reserve = £15,000-30,000.
The Risk-Based Method
More sophisticated:
- Identify risks (loss of key funder, economic downturn, building repair)
- Estimate the financial impact of each risk
- Estimate the likelihood
- Calculate: Impact × Likelihood = Reserve needed for each risk
- Total = your target reserve
Free Template
Reserves Policy — [Charity Name]
Date: [Date]
Approved by: Board of Trustees
Review date: [Annual review date]
1. Purpose
This policy sets out the level of reserves that [Charity Name] aims to hold and the reasons for this.
2. Definition
Reserves are defined as the unrestricted funds of the charity that are freely available to spend on any of the charity's purposes. This excludes restricted funds, designated funds, and fixed assets.
3. Target reserve level
[Charity Name] aims to hold reserves equivalent to [X] months of operating expenditure, currently £[amount]. This is based on [method: monthly expenditure / risk assessment / fixed amount].
4. Justification
This level of reserve is intended to provide:
- Working capital for day-to-day operations
- Protection against unexpected income shortfalls
- Cover for [specific risks identified]
- Time to implement alternative funding strategies if needed
5. Action if reserves are below target
If reserves fall below the target level, the Board will [reduce expenditure / increase fundraising / review commitments] to rebuild reserves within [timeframe].
6. Action if reserves exceed target
If reserves exceed the target level, the Board will consider [increasing charitable activities / investing in strategic priorities / setting aside designated funds for specific projects].
7. Review
This policy will be reviewed annually by the Board of Trustees and updated as necessary.
Common Mistakes
- No policy at all — the most common issue, especially for small charities
- "We hold reserves" without saying why or how much — a policy must be specific
- Not reviewing annually — your circumstances change; so should your reserve target
- Holding too much — a charity with 5 years of reserves in the bank isn't fulfilling its mission
- Confusing restricted and unrestricted funds — restricted funds are NOT reserves
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