In this blog, Lizzy Bird and Tim Wyatt from Wyatt & Co Chartered Accountants explain how to decide what level of cash reserves your charity should hold.
It’s a tricky balance to get right. In this guide, they’ll unpack what the Charity Commission says, help you understand what counts as reserves, and share a practical three-step process for setting the right level for your organisation and creating a reserves policy.
What are reserves?
The Charity Commission’s definition of reserves is:
“Part of a charity’s unrestricted funds that is freely available to spend on any of the charity’s purposes.”
This is not simply the balance you hold at the end of the year. Freely available means:
- Not restricted income (which must be used for specific projects)
- Not designated funds (which trustees have set aside for particular future spending)
- Not tied up in fixed assets or investments
- Not liabilities or commitments already accounted for
When you take away the above from your year-end balance, what’s left is your free reserves.
Why hold reserves?
Most charities across the UK hold some level of reserves. They act as a financial buffer—helping you continue your activities during unexpected changes, delays in funding, or rising costs. Reserves also give you the flexibility to respond to opportunities or emergencies when they arise.
Recent years have shown how vital that resilience can be. Many charities had to draw on reserves during global events like the pandemic—and now are in the process of rebuilding their reserves.
As a charity, you need to strike a balance. Trustees are stewards of the charity’s funds—not hoarders of them. You’re expected to spend money to achieve your charitable aims, while also protecting the charity’s future sustainability.
What does the Charity Commission say?
What level of reserves your charity should hold is a great question for church and charity leaders and finance teams to ask themselves.
However, there is no ideal, set standard, or recommended level of reserves for small charities. The Charity Commission’s guidance (CC19: Charity Reserves – Building Resilience) makes this clear:
“There is no single level or even a range of reserves that is right for all charities. Any target set by trustees… should reflect the particular circumstances of the individual charity and be explained in the policy.”
In other words, it’s up to trustees to think carefully, make a plan, and write it down.
In this video, Tim Wyatt from Wyatt & Co Chartered Accountants, explores the concept of reserves further:
Writing or updating your reserves policy
Here are 3 steps to help you decide what level of reserves you should hold:
Step 1. Check your current policy
Your charity may already have a reserves policy. It’s usually included in the Trustees’ Annual Report and reviewed each year.
Start here. Is it still relevant? Has anything changed—like your costs, risks, or future plans?
Some organisations set a target amount (often based on a calculation, such as a number of months’ running costs or an amount linked to future activities). Others set a target range, because a single number isn’t appropriate.
Whatever approach you use, it should be logical and justifiable.
Step 2. Calculate what you need
Even if you have a policy, a fresh calculation can help you decide if your current reserves are too low, too high, or just right for your organisation at this point in time.
Things that are helpful to consider include:
a) regular expenditure
What outgoings do you have as a charity that you are committed to? This may be the cost of the staff team, running a building or loans you hold. Creating a list of your committed outgoing is a helpful exercise when considering what reserves you wish to hold. You can then consider how long you will need to meet these commitments. For the staff team, it may be the length of each team member’s notice period; for the building, it may be the reasonable timescale it would take to sell the building.
Don’t forget the cost of living/inflationary increases you’ve awarded to staff, or which suppliers have passed on to you. Last year’s reserve calculations amount might not be enough anymore.
b) your future plans
Do you have plans to expand your services, increase your staff team, do building works or start new projects in the future? You could consider holding increased reserves for possible future opportunities. It’s common for organisations to link their reserves policy to their longer-term strategy.
c) risk factors
Risk factors may include whether you rely on single or multiple sources of income.
In addition, your income might be unpredictable if you are reliant on grants. Or you might want to consider the timings of your fundraising cycles.
d) your risk appetite
In addition, you should consider, as a board of trustees, what your risk appetite is. Some will wish to be risk-averse and try to save a high level of reserves in case of an unexpected emergency. Others may be more risk-tolerant, especially faith organisations who trust that God will provide. This is a discussion for the trustee board as to where you lie along this spectrum and what risk factors affect you.
e) your charitable objectives
For some charities, a higher level of reserves is required due to the nature of their charitable activity.
For example, Guide Dogs for the Blind have charitable objectives to provide dogs and support to the beneficiaries for the length of time that the dog is alive. Or a veteran Charity that supports ex-service members for the rest of their lives. This commitment to their beneficiaries means that they desire to hold a higher level of reserves to maintain the longevity of their support.
Step 3. Communicate it clearly
Using the considerations above, set a level of reserves that is appropriate for your charity. This might be a specific amount, a range, or a figure based on expenditure (e.g. four months of unrestricted costs).
Once your trustees have agreed on the right approach, write it up in a clear and simple policy. It should include:
- How reserves are defined
- The target level (or range) you aim to hold
- Why that amount is needed
- What the current level is
- Any plans to build up or reduce reserves
This should then be included in your Trustees’ Annual Report and reviewed every year.
What do you need to include in your year-end accounts?
If you are a charity reporting under SORP as you prepare accounts on an accruals basis, your Trustees’ Annual Report must:
- Explain any policy for holding reserves
- State the amount of reserves held at the year-end
- Explain why you hold reserves
- If reserves are being built up or invested, explain the purpose in your financial review
- Clarify any separate designated reserve funds
Larger charities (income over £500,000) must also:
- Show how free reserves are calculated
- Compare actual reserves to the target range
- Explain what steps are being taken if reserves are above or below the target level
Creating a reserves policy isn’t just a box-ticking exercise—it’s a key part of your charity’s financial planning. Done well, it gives your trustees clarity, helps you explain your approach to funders and the public, and builds long-term resilience.
For questions about year-end accounts, speak to your Independent Examiner or Auditor.
Further resources
Always review the Charity Commission’s resources. They offer useful guidance for trustees and finance teams:
• CC19: Charity Reserves – Building Resilience (2016)
• Beyond Reserves (2012), by ACEVO, CFG, IoF, and Sayer Vincent
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