All charities need to develop a policy on reserves which establishes a level of reserves that is right for the charity and clearly explains to its stakeholders why holding these reserves is necessary.
What are reserves?
Reserves are the unrestricted funds that are held by a charity and available to spend on its purposes. Funders often look at the amount of reserves (or “free reserves”) a charity holds to help decide whether to fund them. Local authorities will also ask about reserves to decide whether to allow any discretionary rates relief.
What to consider?
The starting point for calculating the reserves held by a charity is the amount of unrestricted funds. However, some or all of the unrestricted funds of a charity may not be available for spending.
For example:
- if your charity has responsibility for a building, you should hold reserves to meet the costs of repairs and maintenance
- if you employ staff, you should hold funds to cover their notice period and any redundancy they may be entitled to in the case of closure of the charity
Some charities simply state that they will hold a specified number of months operating costs in reserve. However, depending on the commitments of the charity and the types of services it provides, that could be way more than is reasonable, or not enough to meet all its liabilities in the event of closure.
The Charity Commission has published guidance that trustees should:
- develop a reserves policy that:
- fully justifies and clearly explains keeping or not keeping reserves
- identifies and plans for the maintenance of skeleton services for beneficiaries
- reflects the risks of unplanned closure associated with the charity’s business model, spending commitments, potential liabilities and financial forecasts
- helps to address the risks of unplanned closure on their beneficiaries (in particular, vulnerable beneficiaries), staff and volunteers
- publish the reserves policy (even if not required to by law) and ensure it is tailored to the charity’s circumstances The guidance includes “a simple approach to developing a reserves policy" and can be downloaded from: https://www.gov.uk/government/publications/charities-and-reserves-cc19/charities-and-reserves
Download a draft Reserves Policy here: https://www.cvsbeds.org.uk/assets/cvs/files/SPoliciesReserves%20(1).docx
Further Help
- You can download a spreadsheet with instructions for use, to help you calculate redundancy liabilities (and required notice period) based on statutory minimum payments for all staff, at: https://www.cvsbeds.org.uk/assets/cvs/files/CVS/SRedundancyPayNoticeCalculator.xlsx
- Find out more information on the NCVO website: https://www.ncvo.org.uk/help-and-guidance/governance/financial-procedures-manual/writing-the-financial-procedures-manual/financial-responsibilities/reserves-policy/