If you have ever sat in a trustee meeting wondering whether your charity's bank balance is dangerously low, embarrassingly high, or just about right, you are asking exactly the question a reserves policy exists to answer. Most small charities that worry about this are in better shape than they fear: the problem is rarely the money itself, but the absence of an agreed, written explanation of how much the charity means to hold and why.
A charity reserves policy is a short statement, agreed by the trustees, that says how much money the charity aims to keep in freely available reserves, why that amount is right for this charity, and how the trustees will monitor and act on the actual figure. It is one of the most-read parts of any charity's annual report — funders, auditors and the Charity Commission all look for it — and it is one of the 13 policies the annual return asks about. Yet it can comfortably fit on a page or two.
The direct answer to the usual worry: if your charity prepares accruals (SORP) accounts, stating your reserves policy in the trustees' annual report is a reporting requirement, and if you have no policy you must say so in the report. For everyone else it is a firm Charity Commission expectation and basic good practice. Either way, a defensible policy takes one honest board discussion and an afternoon to write.
Is a reserves policy legally required?
Be precise about the legal status, because it is often overstated in both directions.
- Reporting requirement for accruals charities. Charities that prepare accruals accounts under the Charities SORP (FRS 102) must include a statement of their reserves policy in the trustees' annual report — stating the level of reserves held and why. The underlying framework is the Charities (Accounts and Reports) Regulations 2008 together with the SORP. CC19, the Commission's reserves guidance, is explicit that where a charity does not have a reserves policy in place, the annual report should include a statement to that effect. Silence is not an option: you either state your policy or state that you have none.
- The annual return asks. The charity annual return (2023 onwards) asks completing charities which of 13 named policies they have in place, and a financial reserves policy is on that list. Ticking "no" is not an offence, but it is a data point the regulator, and anyone reading the register, can see.
- Commission expectation for everyone. Charity reserves: building resilience (CC19) sets out what the Commission expects: trustees should decide, on evidence, what level of reserves their charity needs — which may legitimately be a decision that it needs very little — and should keep that decision under review — and CC19 itself expects every charity preparing an annual report to state its reserves policy in it, or to state that it has none. Smaller charities using receipts and payments accounts are not bound by the SORP, but the Commission's expectation and the annual return question still apply to them.
So there is no statute that says "every charity must have a reserves policy". But the combination of SORP reporting, the annual return and CC19 means a charity without one has an awkward gap to explain — and, more importantly, no agreed answer to the question "could we survive a bad six months?"
If you are working out which policies your charity needs overall, start with our pillar guide to what policies a charity needs; reserves sits in the small core that applies to almost everyone.
What are reserves — and what are free reserves?
CC19 defines reserves as "that part of a charity's unrestricted funds that is freely available to spend on any of the charity's purposes". In everyday charity finance this figure is usually called your free reserves, and getting it right depends on three distinctions:
- Restricted funds are money given for a specific purpose — a grant for a particular project, an appeal for a named piece of equipment. They are never reserves, because you cannot lawfully spend them on anything else.
- Unrestricted funds are money the trustees may spend on any of the charity's purposes. This is the starting point for the reserves calculation, not the end of it.
- Designated funds are unrestricted money the trustees have earmarked for a future purpose — say, a building repair fund. CC19 notes that designation is administrative only and does not legally restrict the trustees' discretion, but funds designated for essential future spending are excluded when you calculate reserves. If your designations are material, the annual report should quantify and explain them.
To get from unrestricted funds to free reserves, CC19 says to exclude amounts that are not freely available: tangible fixed assets used to carry out the charity's work (the building, the minibus), social investments, designated funds set aside for essential future spending, and commitments you have made but not yet provided for in the accounts.
A worked example makes this concrete. Suppose a village community charity has £80,000 of unrestricted funds at year end. Of that, £15,000 is the book value of its van and office equipment, and the trustees have designated £20,000 towards replacing the hall roof in two years' time. Its free reserves are £80,000 − £15,000 − £20,000 = £45,000. If its running costs are £10,000 a month, it holds about four and a half months of expenditure in free reserves. That single calculation — done once a quarter — tells the board more about resilience than any bank statement.
How much reserves should a charity hold?
Here is the sentence to hold on to, straight from CC19: "There is no single level, or even a range of, reserves that is right for all charities." The Commission deliberately refuses to name a number, because the right level depends entirely on your charity's circumstances.
You will often hear a rule of thumb of three to six months of expenditure. Treat it honestly for what it is: a common convention and a reasonable place to start the board discussion, but not guidance, not a requirement, and not a justification. CC19 warns specifically that standard reserves policy wording is unlikely to "tell the charity's story". A policy that says "we hold three months' costs because that is what charities do" fails the Commission's test even if the number happens to be sensible.
Instead, CC19 asks trustees to base the target on evidence about their own charity:
- Income forecasts and reliability. How dependable is each income source for this year and the next? A charity living on one large grant that expires in March needs a bigger cushion than one funded by hundreds of small regular donors.
- Expenditure forecasts. What is committed — salaries, leases, contracts — and how quickly could spending realistically be reduced?
- Future needs, opportunities, commitments and risks. Where is income alone likely to fall short? In practice this means asking what an orderly wind-down of services would cost if the worst happened — reserves exist above all to protect beneficiaries, staff and volunteers from an unplanned closure.
- Likelihood of a shortfall. On the best evidence reasonably available, how probable is the bad scenario you are insuring against?
Two further points that good policies get right. First, CC19 confirms the target "can be expressed as a target figure or a target range" — and a range (for example, £35,000 to £55,000, or three to five months of budgeted expenditure) is generally better practice for small charities, because it stops the board treating a £2,000 dip as a crisis. Second, too much is also a problem. Reserves persistently above target, with no explanation, invite the question of why the charity is fundraising at all; CC19 notes that apparently excess funds can provoke resentment against a charity "for apparently seeking funds it does not need", and says that trustees with more resources than their purposes require must consider whether the purposes should be amended so the charity can operate more effectively. The policy should therefore say what happens at both ends of the range, not just the bottom.
What your reserves policy should include
A good small-charity reserves policy is a page or two. Here is the anatomy, section by section.
1. Purpose. One or two sentences: this policy sets out the level of reserves the trustees consider necessary, why, and how the level will be monitored and reported. Name the charity and its financial year.
2. Definitions. Define restricted, unrestricted, designated and free reserves in plain English, using CC19's definition of reserves as unrestricted funds freely available to spend. Then show your own numbers: the worked calculation from the last year end (unrestricted funds, less fixed assets, less designations, equals free reserves). A policy that shows its arithmetic is instantly more credible to funders than one that only states a target.
3. The target — and its justification. State the target as a range where possible, and in both pounds and months of expenditure so it stays meaningful as budgets change. Then give the reasons in your charity's own terms: the fragility or reliability of each main income source, fixed commitments such as staff costs and rent, the cost of an orderly wind-down of services, and the specific risks on your risk register that reserves are there to absorb. Three or four honest sentences beat a page of boilerplate.
4. Link to risk management. Reserves are the financial shock-absorber for the risks you have already identified. CC19 is explicit that holding reserves may form part of the strategy for managing an identified risk, and points to the Commission's risk guidance CC26. Cross-refer to your risk management policy and make sure the two documents agree: if the risk register's biggest financial risk is losing your main grant, the reserves justification should say so.
5. Monitoring and reporting. Say who calculates the free reserves figure (usually the treasurer), how often it goes to the board, and against what. Quarterly is the natural cadence for most small charities: a one-line figure against the target range in the treasurer's report, with the full calculation at year end. Making reserves a standing item takes ten seconds per meeting and means no trustee can later say they did not know.
6. Action above or below the range. Define what happens at each end. Below range: the board agrees a rebuilding plan — typically budgeting a modest annual surplus over a stated number of years — and CC19 asks trustees to consider whether the dip is short-term or structural. Above range: the board must either document why a higher level is now justified (and update the policy and annual report to say so) or agree a plan to apply the surplus to the charity's purposes. Both branches should be minuted.
7. Use of reserves — the decision process. Spending reserves is what they are for, but it should be a deliberate board decision, not a drift. State that any planned use of reserves (a deficit budget, a one-off project, bridging a funding gap) requires a board decision recorded in the minutes, with the expected amount, purpose and the plan for restoring the range.
8. Disclosure. Commit to stating the policy, the level of free reserves held and the reasons in the trustees' annual report each year, quantifying material designated funds — and, if the actual level differs from the target, explaining the steps being taken to bring them into line.
9. Review. Name the policy's owner, the review cycle (annually, alongside the budget — see below) and the date of the next review.
Download our free charity reserves policy template (Word) — openly licensed, written for small charities in England and Wales, and yours to adapt with no sign-up.
Adopting it properly
A reserves policy only counts once the board has genuinely engaged with the numbers. The sequence for a small charity: the treasurer drafts the free reserves calculation and a proposed range; the board discusses the justification — this is the one agenda item where every trustee should be pushed to say what level would let them sleep at night; the final policy is approved by a board decision recorded in the minutes, with a named owner and a review date. Because reserves need a quarterly figure and an annual review, this is a policy that quietly dies in a drawer unless something resurfaces it: Trustee Meetings stores your policies with their owners and review dates alongside your agendas and minutes, and prompts you when each one falls due — free to try, no card needed, at /start.
It also pairs naturally with sound day-to-day money handling; the Commission's internal financial controls guidance CC8 is the companion reading, and comes with a free checklist.
Common mistakes
- Copying a "3-6 months" policy without the reasoning. This is one of the two reasons CC19 gives when reserves look too high: trustees "have not explained fully the reasons why they are keeping the level of reserves that they are". A copied policy is worse than a modest one you can defend.
- Counting restricted funds as reserves. A healthy-looking bank balance that is mostly restricted grant money is not resilience — it is other people's projects. Always calculate free reserves, not the bank balance.
- Forgetting fixed assets and designations. A charity that owns its building can show large unrestricted funds and near-zero free reserves. The deductions are the whole point of the calculation.
- A single-point target. "We will hold £40,000" turns every normal fluctuation into a policy breach. A range gives the board room to manage.
- No plan for being over target. Boards write the "below range" paragraph and skip the "above range" one — then find themselves explaining a growing surplus to a sceptical funder with nothing in writing.
- Setting the policy and never reporting the figure. If the board sees free reserves once a year, the policy is decoration. Quarterly, one line, against the range.
- Stating a policy in the annual report that the accounts contradict. Reviewers do check whether the reported reserves level matches the policy; if it does not, say what you are doing about it rather than hoping nobody notices.
Review cadence — and what triggers an early look
CC19 says trustees should review the reserves policy at least annually as part of the charity's planning processes, and the natural moment is alongside setting the annual budget: the same income and expenditure forecasts drive both. Between reviews, monitor the actual level through the year as part of normal budgetary reporting.
Bring the review forward if: a major funding source is won, lost or put at risk; you take on significant new commitments (first employees, a lease, a big contract); reserves move outside the range and stay there; the charity's activities or risk profile change materially; or a new SORP or Commission guidance revises the reporting requirements. Any early review, like the annual one, ends with a minuted board decision — even if the decision is "no change".
Reserves connect to almost everything else a board does with money and risk, so once your policy is drafted it is worth reading it alongside our guides to the charity risk management policy (reserves are the shock-absorber for the risks on that register) and the conflict of interest policy (decisions to spend reserves deserve the same discipline as any other significant decision). For the reporting side, our guide to charity outcome reports shows how to tell the story your reserves make possible, and how often trustees should meet will help you decide where the quarterly reserves figure fits in the board's year — and when you are ready to write yours, the free reserves policy template is the place to start.