Reserves

Reserves are funds that are held by a charity but are freely available. ‘Freely available’ means that they are not restricted to or designated for a particular purpose.

Trustees must generally spend the income of the charity within a reasonable time, unless they can explain and justify the need to hold back reserves. 

In practice, charities do and should hold some reserves and their existence is a sign of good financial management. Reserves can cover a charity in the event of unexpected costs such as repairs or cashflow difficulties. They can also help a charity close in a controlled way. 

Reserves should be held at a suitable level that can be justified in a reserves policy. A ‘suitable level’ varies from charity to charity depending on its financial position.

If reserves are too low (or do not exist) a charity may not be able to function when there are unexpected bills; too high and trustees may face criticism for not using the charity’s funds properly. 

Charities must include a paragraph in their trustees' annual report about their reserves policy held setting out reasons for holding reserves. 

Many charities agree a ‘reserves policy’, a document agreed by trustees justifying the planned level of reserve.