Across the sector, questions about reserves continue to surface – in board meetings, audit reviews and annual reports. Behind them lies a shared concern: how to balance prudence with purpose.

Too little in reserves can leave a charity exposed. Too much can prompt awkward questions. And while guidance exists, the real work lies in applying it to your organisation’s circumstances.

We’ve previously explored how surpluses arise and why they matter. This article focuses on what happens next when some of that surplus is set aside as reserves.

From regulatory expectations to practical planning tools, this is one of charity finance’s most closely scrutinised topics.

What Are Charity Reserves and Why Do They Matter?

Reserves are the portion of a charity’s unrestricted income which is kept aside to support day-to-day work during periods of financial uncertainty. They allow a charity to continue its operations if income drops or costs rise unexpectedly. In practical terms, reserves buy time to review budgets, adjust delivery or seek new funding.

It’s important to separate reserves from other types of unspent funds:

• Restricted funds are tied to a specific project or outcome and cannot be used for general costs.
• Designated funds are earmarked by trustees for a purpose but remain flexible.
• Unrestricted reserves are available to support the charity’s wider work, within its charitable objects.

Most scrutiny falls on unrestricted reserves, especially where balances appear high or policies are unclear.

What Does the Charity Commission Say About Reserves?

There is no fixed rule on how much a charity should hold in reserves. The Charity Commission does not set a percentage or ideal figure. Instead, it asks trustees to justify their approach based on the organisation’s needs, risks and plans.

Good governance starts with clarity. The Commission expects every charity to:

• Explain its reserves policy in the annual report.
• Review the policy regularly.
• Make decisions based on realistic financial planning.

If reserves appear high, trustees should be prepared to show why. If they are low, the board should explain how this risk is being managed. In either case, the goal is the same: to show that funds are being held for clear, charitable purposes.

Public confidence is part of this picture. A vague or outdated policy can raise concerns among funders and the public. A well-structured explanation reinforces trust and shows that the board is active in its oversight.

Practical tip: The Charity Commission’s CC19 guidance sets out how to approach reserves. It includes useful prompts to help trustees identify key risks and assess how reserves can support them. You can read it here: CC19: Charity Reserves.

How to Calculate an Appropriate Reserves Level

Each charity must determine its own reserves level based on what it needs to operate safely and respond to risk.

Start by answering four core questions:

1. What does it cost to keep the charity running?

Look at your core operating costs for a typical month. These include:

• Staff salaries and pensions
• Rent, insurance, and utilities
• Service delivery and compliance costs

Multiply by 3 – 6 months to set a basic safety range.

2. Where is your income most vulnerable?

Review your funding mix. Identify:

• Contracts ending within 12 months
• Donor or grant dependency
• Seasonal or unpredictable income patterns

A charity with a single major funder may need higher reserves than one with a diversified income base.

3. What’s on the horizon?

List any major commitments or changes in the next 1 – 3 years:

• Expanding services or locations
• Investing in new systems or staffing
• Restructuring or merger discussions

Strategic reserves can support development when income is delayed or phased.

4. What would be hard to handle without notice?

Consider less predictable events:

• A legal issue
• A safeguarding investigation
• A delay in grant payments

These scenarios shape your contingency planning.

Board responsibility: Once agreed, record the rationale for your reserves level in the board minutes. Make sure it aligns with your risk register and financial strategy.

What Happens If a Charity Has Too Much in Reserves?

Surpluses can be a sign of forward planning, but when reserves grow beyond what is needed, scrutiny often follows. You may face questions from funders, auditors or the public about why funds are not being used for current delivery.

Large reserves do not signal mismanagement, but they do require explanation. If the rationale is missing, or if the policy feels disconnected from the charity’s activity, trust can erode.

A higher reserve level might reflect:

• Preparation for a time-limited capital project
• A planned service expansion within the next financial year
• Known funding gaps on the horizon

What matters is that the board can demonstrate intent and oversight. This includes reviewing reserve levels annually and updating the narrative in your financial statements.

Example: “We are maintaining additional reserves to support a property move planned for early 2026. This is aligned with our strategic plan and supported by a detailed cost forecast.”

Clear, timely communication gives funders and stakeholders confidence in your governance.

How to Explain Reserves in the Trustees’ Report

Each year, trustees must explain how reserves are held, calculated, and applied. This section of your annual report supports transparency and helps funders, regulators, and supporters understand how your charity manages financial risk.

A clear reserves statement should include:

1. Your Reserves Policy

Start by stating why the charity holds reserves. Common reasons include income volatility, planned investments or service continuity. Make sure the policy is specific to your organisation and not taken from a template.

2. Current and Target Levels

Quote exact figures.

For example: “As of 31 March 2025, free reserves totalled £88,000. The board considers £75,000 to be an appropriate level, equivalent to three months of core operating costs.”

Avoid vague phrases like “a reasonable amount” or “some reserves for emergencies.”

3. Justification and Use

Explain what the reserves cover. This could include salary costs, lease commitments or upcoming service expansions. If you hold more than the target, explain the purpose.

4. Any Plan to Address Gaps

If reserves fall short or exceed your policy, describe how the board is responding. Link this to your financial strategy.

Tip: Align this narrative with your SOFA and ensure figures match across all documents.

How to Use Reserves Strategically: Planning with Purpose

A well-managed reserve allows trustees to make decisions with stability. It supports delivery, protects continuity and enables forward planning.

There are four main ways reserves contribute to a healthy financial strategy:

1. Service Continuity

Maintaining a reserve equal to 3 – 6 months of core costs helps cover day-to-day operations in periods of delayed funding or slower income. This creates space to adjust without disrupting essential work.

2. Programme Delivery

Reserves can support the start or expansion of a key project. When trustees set funds aside for a defined purpose, this strengthens internal planning and signals a clear intent to funders.

3. Investment and Infrastructure

Upgrades in systems, facilities or staffing require financial commitment. A designated reserve can provide this support while keeping general funds stable. Linking each allocation to an organisational goal reinforces transparency.

4. Risk Preparedness

Every board identifies different areas of exposure. These may include property issues, unexpected costs or sector-wide changes. Allocating part of the reserve to these scenarios strengthens financial resilience.

Where Trustees Often Struggle with Reserves

Reserves policies are often treated as background paperwork – filed once, then forgotten. But they carry more weight than that. A strong reserves approach gives trustees the space to lead confidently, even when the unexpected happens.

That starts by avoiding a few common pitfalls:

• Outdated assumptions – A policy set five years ago may no longer reflect current risks or spending. Regular review helps keep the board aligned with reality.
• Language without meaning – Generic templates might look compliant, but they don’t explain your charity’s thinking. A policy written in your own words is far more useful.
• Overlooking designated funds – When calculating free reserves, it’s easy to miss funds that have been set aside internally. Those allocations still matter and so does explaining them.
• Silence at board level – When reserves discussions are left to a few, decisions risk becoming unclear. A shared understanding strengthens governance.
• Public silence – If funders or supporters can’t see the rationale, doubts grow. Transparency helps avoid that.

Ask yourself: Would every board member give the same answer if asked about our reserves?

Reserves Should Strengthen Confidence, Not Create Doubt

Reserves do not require a perfect formula. What they need is clarity, relevance, and honest reflection. A well-managed policy gives your charity room to grow, withstand pressures and respond to change with stability. For trustees, that means treating reserves as part of leadership.

If you would value a second pair of eyes on your reserves policy or need help aligning it with your plans, we can support you. At Charity Accounting Partners, we work exclusively with charities and understand the details behind the figures.

Is your current reserves policy helping your board make better decisions? Get a free evaluation today!