"How much should we keep in reserves?" is the question trustees ask most and answer worst. Hold too little and you look fragile — one late grant from insolvency. Hold too much and funders wonder why they should give you more. There's no universal number, but there is a defensible one for your charity, and setting it is a trustee duty, not an optional extra.

What "reserves" actually means

Reserves are your free, unrestricted funds — money not tied up in fixed assets and not restricted to a purpose. Restricted grants don't count (you can't spend them on survival). Designated funds usually don't either. So a charity with £200,000 in the bank might have £30,000 of actual reserves once you strip out restricted money and amounts committed to fixed assets. The reserves figure is almost always smaller than the bank balance — and it's the one that matters.

The trustee duty

The Charity Commission expects trustees to set a reserves policy, justify it, and report it in the trustees' annual report (required for larger charities, good practice for all). "We aim to hold enough" is not a policy. A policy states a target range, the reasoning, and what you'll do if you're outside it.

How to land on a figure

There's no statutory number — the right level depends on your risk profile. Work it from the risks, not a rule of thumb:

  • Income volatility. Reliant on a few big grants that could end? You need more. Diverse, recurring income? You can hold less.
  • Commitments. Leases, employment contracts, multi-year promises — how much would you need to wind down responsibly if income stopped?
  • Notice periods. How long between "the money's stopping" and having to act? Longer notice, lower reserves needed.
  • A common landing point is three to six months of core running costs in free reserves — but treat that as a starting sanity-check, not the answer. Justify your number from your risks.

The over-reserves problem

Sitting on a big pile looks prudent but reads badly to funders: "why fund you when you're sitting on two years of costs?" If your reserves genuinely exceed your risk-justified level, the answer is a plan to spend the excess on the mission — often via designated funds earmarked for specific developments — and to say so in your report. Deliberate and explained beats large and unexplained every time.

Get the numbers behind the policy

A reserves policy is only as good as the fund analysis under it — which means knowing your true free reserves, not your bank balance. That's fund accounting done properly, and it's central to what our charity packages deliver: the numbers, the policy support, and the reporting that keeps trustees and funders confident. Talk to us.