• Accounting
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• July 15, 2026

A charity reserves policy is a key element of effective financial management and good governance. It allows trustees to determine the appropriate level of funds the charity should retain to manage future risks, maintain financial stability, and continue delivering its charitable objectives.

A clearly documented reserves policy gives confidence to trustees, donors, funders, and regulators that the charity is taking a responsible approach to managing its finances and planning for the future. At Adept Accountax, based in and supporting charities across Greater London, we help trustees build reserves policies that are practical, defensible, and genuinely useful — not just a compliance exercise.

What Are Charity Reserves?

Charity reserves represent the funds that are available to support the charity’s ongoing activities after taking into account any amounts that are committed, restricted, or set aside for specific purposes.

In practical terms, reserves act as a financial safety net. They help a charity deal with unexpected challenges, such as a reduction in funding, unexpected expenses, rising operating costs, or temporary cash flow pressures.

It’s important to understand that not all funds held by a charity will qualify as reserves.

Which Funds Are Not Included as Charity Reserves?

Certain types of funds are generally excluded when calculating a charity’s available reserves because they are not freely available for general use.

Restricted Funds

Restricted funds are amounts received by a charity that can only be used for a specific purpose, project, or activity set by the donor or funding provider.

Examples include:

• A grant provided specifically to deliver a particular community programme.
• Donations collected for purchasing specialist equipment.
• Funding received for a specific charitable project.

Because these funds must be used for the purpose for which they were provided, they cannot normally be used to cover general running costs or other activities.

Designated Funds

Designated funds are unrestricted funds that trustees have chosen to allocate for a particular future purpose.

Examples include:

• Planned building repairs or maintenance.
• Future charity projects.
• Replacement of equipment or assets.

Although trustees have set these funds aside for a specific purpose, they remain unrestricted in nature. This means trustees may decide to use them for another purpose if the charity’s circumstances change and there is a need to do so.

Fixed Assets

Assets such as buildings, vehicles, or equipment used by the charity are generally not included in reserves because they cannot easily be used to pay day-to-day expenses without affecting the charity’s operations.

Why Does a Charity Need a Reserves Policy?

A reserves policy helps trustees answer important questions, such as:

• How much money does the charity need to keep available?
• How will the charity manage unexpected financial challenges?
• Are current reserves sufficient to support future activities?
• Are there plans to use surplus funds effectively?

A clear policy demonstrates responsible financial management and supports long-term sustainability.

How Much Should a Charity Hold in Reserves?

There is no single amount that applies to all charities. The appropriate level of reserves depends on the charity’s individual circumstances.

Trustees should consider factors such as:

• The charity’s size and activities.
• The stability of income sources.
• Reliance on grants or donations.
• Staffing commitments.
• Contractual obligations.
• Potential financial risks.
• Future plans and projects.

Many charities choose to hold reserves equivalent to several months of operating costs, but the appropriate level should be based on a proper assessment of risks rather than simply following a standard percentage.

What Should a Charity Reserves Policy Include?

A good reserves policy should explain:

1. The Purpose of Holding Reserves

The policy should clearly explain why the charity maintains reserves.

For example:

“The purpose of maintaining reserves is to ensure that the charity can continue delivering its objectives during periods of unexpected financial pressure or changes in income.”

2. The Target Level of Reserves

The charity should state the target level of reserves and explain how this figure has been calculated.

For example:

• Three to six months of core operating costs.
• Amount required to cover specific financial risks.
• Funds needed during a planned transition period.

3. How Reserves Will Be Used

The policy should explain the circumstances where reserves may be used, such as:

• Unexpected loss of funding.
• Emergency repairs.
• Significant increases in operating costs.
• Temporary cash flow difficulties.

4. How Reserves Will Be Reviewed

Trustees should regularly review the reserves position and update the policy when circumstances change.

Reviews may consider:

• Changes in income.
• Changes in expenditure.
• New projects.
• Increased financial risks.

Reporting Charity Reserves

Registered charities are generally expected to explain their reserves position in their annual report.

Trustees should provide information on:

• The charity’s reserves policy.
• The level of reserves held.
• The reasons for any difference between actual reserves and the target level.
• Plans to increase or reduce reserves if necessary.

Transparent reporting helps maintain trust with donors, supporters, and stakeholders.

Common Mistakes Charities Make With Reserves

Some common issues include:

• Holding excessive reserves without explaining why.
• Having no documented reserves policy.
• Treating restricted funds as available reserves.
• Using reserves without trustee approval.
• Failing to review reserves regularly.

A reserves policy should not simply be prepared for compliance purposes; it should be a practical tool to support better decision-making.

Good Practice Tips for Trustees

Trustees should:

• Prepare and approve a written reserves policy.
• Review reserves regularly at trustee meetings.
• Link reserves decisions to the charity’s financial risks.
• Explain reserves clearly in the annual report.
• Ensure funds are used effectively to achieve charitable objectives.

Need Help With Charity Financial Management in Mitcham & Greater London?

Preparing and maintaining a suitable reserves policy is an important part of charity governance. Trustees must balance protecting the charity’s future with ensuring that funds are actively used to deliver charitable objectives.

At Adept Accountax Limited, we support charities across Mitcham, Greater London and the wider UK with financial management, charity accounts, compliance requirements, and governance advice. Our team can help trustees understand their reserves position, prepare appropriate policies, and improve financial controls.

If you have any questions about charity reserves, accounting requirements, or need support with your charity’s financial management, please contact Adept Accountax Limited. We’d be happy to provide practical guidance tailored to your organisation.

Adept Accountax Limited | Charity Financial Management & Governance Advisers in Mitcham, Greater London Helping charities manage their finances with confidence. 📞 Call us today | 📧 Get in touch online

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Frequently Asked Questions

Is a reserves policy a legal requirement for charities? Registered charities are generally expected to explain their reserves position in their annual report, so while the format isn’t rigidly prescribed, having a clear, documented policy is considered standard good governance and is often expected by funders and regulators.

Can a charity hold too much in reserves? Yes. Holding excessive reserves without a clear justification can raise questions from donors, funders, and regulators about why funds aren’t being used more actively to further the charity’s objectives.

Are restricted funds counted in a charity’s reserves? No. Restricted funds must be used for the specific purpose set by the donor or funder, so they’re excluded from a charity’s calculation of freely available reserves.

How often should trustees review the reserves policy? There’s no fixed rule, but reserves should be reviewed regularly at trustee meetings — many charities review annually alongside their accounts, or sooner if income, expenditure, or risk levels change significantly.

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This article is intended as general guidance and does not constitute professional or legal advice. Contact Adept Accountax for advice specific to your charity’s circumstances.