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As part of our Charity trustee insights hub, we have already established the importance of reserves and having a robust policy in place.

The next step is setting your charity’s reserves policy. Here are 10 practical tips...

1. Clear understanding of your reserves

Have a clear understanding of your current reserves composition and the total free reserves, ie those that are freely available to spend on any of the charity’s purposes. 

• Fixed assets held may be excluded from the calculation of free reserves where they are essential to the delivery of the charity’s aims.
• Be clear about the purpose of any designated funds.
• Understand the nature and amount of restricted funds, including any endowments.

2. Planning and horizon scanning

What is the charity’s strategic plan and what key plans are on the horizon? 

Now that you have your starting point, you can begin assessing what is required to support the charity for the future. There should be a relationship between the charity strategy and reserves. Link the assessment of the level of reserves required to your budgeting process for the next 12 months for short-term reserves needs and more longer-term forecasts for the next 2-5 years.

3. Risk register

The charity’s risk register will be linked to its strategic plan and should also link to reserves. 

• Review the risk register and consider the financial impact of risks and whether reserves are required to manage how these risks then impact the charity’s operations. 
• Challenges, such as funding shortfalls, form part of the charity’s risk management and, therefore, part of the reserves policy. 

4. Project planning

As part of future project planning, the charity may wish to set aside certain reserves as designated for a specific future project. This helps stakeholders reviewing the financial statements to clearly see elements of funds held that are not freely available for use for the charity’s purposes but have been earmarked for a particular future commitment. 

5. Capital expenditure plans 

If the charity’s strategy includes significant capital projects, establish how these will be funded. If the intention is to fully fund from reserves, a plan will be required to ensure that the charity has sufficient reserves to fund the project and also continue its day-to-day operations. If some level of external financing is anticipated, the lender will also wish to see a certain level of funds to assess the charity’s ability to service the debt.

6. Understanding income streams

Understanding and assessing the certainty of income streams is integral to setting a reserves policy. The Charity Commission guidance (CC19) on reserves includes examples of issues that trustees should consider in this area. Many charities, particularly those reliant on grant funding from government, have seen income levels fall or be subject to uncertainty regarding future levels. The greater the level of uncertainty, the greater the need for reserves for contingency planning. Conversely, the charity may need fewer reserves if income is stable or relatively predictable.

Reserves should include an element of protection against unplanned income shortfalls or unexpected expenditure. Events in recent years, such as the global pandemic, have highlighted the need for charities to have funds in reserve. 

7. Set a target level of reserves

Once the current position has been established and the future needs linked to strategy and risk, a target level of reserves can be set.

It is important to reiterate that there is not a golden number or target set for charities. For example, it is incorrect to state that “all charities should hold 6 months of expenditure in reserves”. The target will be specific to the individual charity’s own plans. 

The target could be a range or specific value and may be made up of several components that address the strategy and forecasts.

8. Where are you now? 

Armed with the current position and the target, the charity can assess its current position.

If there is a shortfall, plans should be put in place to address this and move the charity to the target level. 

If the charity has excess reserves above target levels, is it making the best use of funds to support its beneficiaries and deliver its objectives? 

9. Reporting your reserves policy

The Charities SORP (FRS 102) sets out the required review of reserves in the charity’s annual report. 

10. Ongoing monitoring

Reserves should be monitored on a regular basis by management and trustees. External and internal circumstances impacting a charity are subject to change, and the reserves policy and requirements will alter as a result. 

Ongoing monitoring should be included in the management reporting. The policy should be reviewed as part of the annual cycle of agenda items for the board or relevant subcommittee.

How we can help with your charity’s reserves policy

This article is part of our Charity trustee insights hub. It has some great insight pieces for charity trustees to consider on key topics right across the charity sector, including governance, reserves, digital transformation and finance function, to name a few.

If you would like to discuss the importance of reserves for your charity, please get in touch with Nick Sladden, Zoe Longstaff-Tyrrell or your usual RSM contact.

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