Reserves policy

A reserves policy explains to existing and potential funders, donors and other stakeholders why your group is holding a particular amount of money in reserve.

Operating reserves

An operating reserve is an unrestricted fund balance set aside to stabilise your groups finances by providing a cushion against unexpected events, losses of income, and large unbudgeted expenses.

The most common trigger for use of operating reserves is when income falls, such as when a previously reliable source is reduced or withdrawn. Since operating reserves are most valuable if they are reliable, an important factor in using reserves is also having a realistic plan to replenish them.

Operating reserves should not be used to cover a long-term or permanent income shortfall. Reserves can allow your group to weather serious bumps in the road by buying time to implement new strategies.

To be prudent, reserves should be used to solve temporary problems, not structural financial problems.

Operating reserves may be a part of your group’s unrestricted cash or working capital. Ultimately, your group needs to have sufficient cash flow coming in from various income sources and going out to pay for the weekly operation of your group, volunteer expenses and other obligations when they are due. Some charities create reserves by setting aside cash in addition to the regular bank fund balances for use if or when regular cash flow is disrupted.

Reserves are also different from restricted funds. Restricted funds are grants and contributions that have been received for specific programs or projects. These funds are “restricted” for use according to the grant agreement or donor’s instructions. Sometimes this means that restricted funds sit idle in the bank for a while cannot be uses for some other purpose.

Reserves, on the other hand, are “unrestricted” funds that can be used in any way that your group executive committee chooses.

Your reserves policy

Your reserves policy should give the parents/guardians of your members, your volunteer team and any other stakeholders, confidence that your group's finances are being well managed and also provide an indicator of future funding needs. By creating a reserve policy you can set aside enough money to meet a potential need, such as an unexpected drop in income. 

How to set a reserves policy

Your reserves policy should set out:

  • how much your group needs to hold in reserve and why

  • how and when your group’s reserves can be spent

  • how often the reserves policy will be reviewed

 

Example reserves policy..

Reserves Policy
The work of the group executive committee involves issues concerning financial control, particularly in the budgeting of events, activities and equipment maintenance as well as regularly monitoring the financial risks to which the group may be exposed.

The group’s income is generated from investments, donations, grants and the membership subscriptions paid by members of the group. The reserves policy of the group is such that our reserves continue to be held in low risk managed portfolios; the executive committee reviews the investments annual to ensure we are able to achieve a fair rate of return on the capital reserves held.

The reserves policy was declared by the group executive committee to be the ‘maintenance of available funds, excluding known commitments and contingent liabilities, equal to a minimum of one year’s budgeted revenue expenditure’ and can be used should they be a fall in the groups annual income.

The group's policy on reserves is to hold sufficient resources to continue the charitable activities of the group should income and fundraising activities fall short. The group executive committee considers that the group should hold a sum equivalent to XX months running costs, circa £X.XX.

The group held reserves of approximately £X.XX against this at year end. This is above the level/below required for operating expenses. However, this can be explained by ..........

 

Charity Commission guidance:
How to set a reserves policy for your charity