A charity reserves policy trustees can actually use

Most small charities have a reserves policy in the sense that a sentence about reserves appears in the trustees' annual report. Far fewer have one that does any work — that names a figure, explains where the figure came from, and tells the trustees what to do when reserves drift above or below it.

That matters more than it used to. Funders read the reserves policy as a proxy for whether the trustees have their hands on the wheel. And the Charity Commission's position is straightforward: trustees should have a policy, review it, and explain it in the annual report — including the amount held and why that amount is right for this charity.

What "reserves" actually means

The word gets used loosely, so start here. Reserves means free reserves: income funds the charity can spend on any of its purposes, at the trustees' discretion, right now.

Which means the following are not reserves, and stripping them out is the whole calculation:

• Restricted funds — the donor said what they were for. Not available.
• Endowment — permanent or expendable, held as capital. Not available.
• Funds tied up in fixed assets — the value of the building or the minibus is real, but you cannot pay the salaries with it.
• Designated funds — trustees have earmarked these for a purpose. They remain legally unrestricted and can be un-designated, so treat them honestly: either say they are excluded from free reserves and explain why, or include them and admit the designation is soft.

Working out the right level

There is no correct percentage. A policy that says "three to six months of expenditure" because that is what the last charity's policy said is a borrowed answer, and it will not survive a funder asking why. The number should come from four questions about this charity:

How volatile is the income? A charity funded by one three-year grant is in a completely different position from one with two hundred standing orders. The more concentrated and the more cliff-edged the funding, the higher the reserves need to be.

What would it cost to stop? This is the number trustees most often overlook. If the charity had to wind down, what would it owe — notice pay and redundancy, the remainder of a lease, dilapidations, contract exit costs? Reserves that cannot cover an orderly closure are a governance problem, not just a financial one.

What is coming that is not in the budget? A roof at end of life, a vehicle to replace, a system to upgrade. These belong in designated funds with a stated purpose rather than lurking inside free reserves.

How long would replacement funding take? If the main grant ended, realistically how many months to secure something else — and reserves should cover that gap, not an optimistic version of it.

A worked example

Note what makes that defensible: every component is traceable to something about the charity. A trustee can explain it at an AGM, and a funder can see the trustees have thought rather than copied.

Wording that does the job

A usable policy covers five things, and fits on one page:

• Why reserves are held — the specific risks this charity is protecting against.
• What counts — the definition of free reserves used, and what is excluded.
• The target — a figure or range, with the reasoning behind it.
• What happens outside the range — below target: how it will be rebuilt and over what period. Above target: how the surplus will be spent on the charity's purposes, because holding money without a reason invites the obvious question.
• When it is reviewed — annually, at a named point, by the trustees.

That last pair is where most policies fail. A policy with no consequence when reserves fall short is a description, not a policy. And a charity sitting well above target with no plan is effectively holding donors' money back from the purposes they gave it for — which is precisely the criticism the Commission's guidance is designed to prevent.

The annual report paragraph

The trustees' annual report should state the policy, the amount of free reserves actually held at the year end, and whether that is within target — and if not, what is being done. Three or four sentences. If the reported figure does not agree to the accounts, that is the first thing an examiner or auditor will ask about, so calculate it from the accounts rather than from memory.

Getting it done

The realistic sequence for a small charity: calculate free reserves from the last set of accounts, work through the four questions above with the trustees at one meeting, agree a range, write the page, minute the adoption, and diarise the review. It is an evening's work once, then twenty minutes a year — and it converts the most-scrutinised paragraph in the annual report from a liability into evidence that the charity is well run.

Check the Charity Commission's current guidance on charity reserves for the requirements applying in your year, as guidance is periodically updated. Thresholds and reporting requirements referred to here are for England and Wales.