3. How should charity trustees set a reserves level?

Why you might need reserves

To understand why you might need reserves you first need to understand your charity’s financial position and how this links with your charity’s activities. Budgets and future plans need to be considered, in particular any uncertainty over future income or the risk of unexpected expenditure. When you review your future plans you should consider whether expenses can be met from annual income or whether reserves may be needed to meet costs. 

Particular areas to consider are:

• Funds to allow for unforeseen emergencies or other unexpected needs, for example an unexpected repair bill or requiring funding for an urgent project.
• Unforeseen day to day operational costs, such as cover for long-term sick absence.
• Grant income not being renewed, and how much notice you would get if this is the case.
• Planned commitments which may need higher levels of reserves.
• Funds to allow for increased beneficiary need - external changes may mean your charity receives additional beneficiaries.
• The need to fund short-term deficits in a cash budget, for example money may need to be spent before funding is received.

How much do you need in reserve?

You need to think about the reasons you might need reserves and the amount you would need for each reason. It might not be practical to consider holding reserves for all eventualities, so you need to consider the likelihood of events happening, as well as how much money it could cost.

Things to consider are:

• Are you planning for unforeseen emergencies or day to day operational costs? You will need to judge what amount of expenditure is required. You might want to hold back an amount as a contingency against unforeseen costs. 
  
  
• Is there uncertainty over future income? You may want to hold funds to meet expenditure for a period to allow for any gaps in funding. For example: having reserves equivalent to a number of weeks or months expenditure to allow time to develop new sources of income or consider the future of the charity’s activities.  
  
  
• Has a specific cost been recognised, such as an improvement to facilities? Reserves may need to be built up to meet this future cost. 

The reasons why you need reserves will determine the amount of reserves and how this is reflected. In some cases reserves will be a specific amount; in others it may reflect a number of months or weeks expenditure which could fluctuate.

It is important to recognise that there is no formula or one size fits all approach to reserves and you need to consider what is relevant for your charity.

How much you need may vary. If one year you have a specific project planned you may need a higher level of reserves that you won’t need the next year. You should review the level required regularly to make sure it is still fit for purpose.