Charity reserves policy examples

A reserves policy is a short statement of how much money your charity aims to keep in reserve, and why. It is not about hoarding or about hitting a magic number — it is about judging, honestly, how big a financial buffer your particular charity needs to weather a bad year and meet its commitments. Because that judgement depends on circumstances, this page gives three worked, annotated example policies for three different situations. All are illustrative and fictional; adapt the thinking, not the figures.

The Charity Commission (guidance CC19) expects trustees to set a reserves policy explaining the level of reserves the charity holds and why, but sets no single required figure. (Source: GOV.UK, Charity reserves: building resilience (CC19).) The right level is the one your trustees can justify against your own risks — which is exactly what these three examples show.

How a reserves policy is judged

A reserves policy is judged not by the size of the number but by the reasoning behind it. The right level depends on how predictable your income is, how concentrated your funding is, what fixed commitments you carry (staff, leases), and how quickly you could raise money or cut costs if income fell. A charity with steady income and few commitments can safely hold less; one with lumpy income or a big lease needs more. Each example below states a level and, crucially, the reasoning that makes it appropriate.

What a reserves policy should contain

A good reserves policy is short — a paragraph or two — but it should cover four things clearly: why the charity holds reserves, the level or range the trustees aim for and the reasoning behind it, what the charity counts as free reserves, and when the policy is reviewed. Each example below does all four.

Beyond those essentials, a strong policy ties the target to real risks rather than a round number, distinguishes free reserves from restricted and designated funds, and — where the charity reports one — states the actual level held and explains any gap between that level and the target. Charities that prepare a Trustees’ Annual Report include the policy and the level there, so the two should say the same thing. Keep the language plain: a trustee, a funder or a member of the public should be able to read your policy and understand, in a minute, how much you hold and why.

Illustrative example 1: Oakvale Befriending — a small charity with stable income (~£50,000)

Oakvale Befriending is a fictional small charity with steady local grant and donation income, a part-time coordinator and volunteers, and few fixed commitments. A modest reserve of a few months’ running costs is enough to protect its services against a temporary dip in income. Its reserves policy reads as follows.

Illustrative reserves policy — Oakvale Befriending

Oakvale Befriending holds reserves to protect its services against a temporary fall in income and to meet its commitments as they fall due. The trustees aim to hold free reserves of between three and six months’ running costs — currently £12,000 to £24,000. Free reserves are the charity’s unrestricted funds, excluding any restricted funds and amounts tied up in equipment. The trustees review this policy and the level of reserves held each year, alongside the annual accounts. At the year-end, free reserves were £18,000, within the target range.

Illustrative example 2: Brightway Futures — a larger, grant-funded charity with a lease (~£520,000)

Brightway Futures is a fictional medium-sized charity that employs staff, relies on a small number of large funders, and holds a three-year office lease. Those commitments and that funder concentration mean it needs a clear reserve to protect salaries and services if a major grant ends, plus a separate designated fund for a known future cost. Its policy reads as follows.

Illustrative reserves policy — Brightway Futures

Brightway Futures holds reserves to manage the risks it faces — chiefly its reliance on a small number of large funders, and its commitments to staff and to a three-year office lease. The trustees aim to hold free reserves equal to at least three months of the charity’s core running costs — the staff, premises and governance costs it would need to fund itself if project income stopped, which is narrower than its total unrestricted income or total expenditure — currently around £95,000, so that the charity could continue its core work and meet its obligations while it responded to the loss of a major grant. Free reserves exclude restricted funds, funds designated for specific commitments, and amounts tied up in fixed assets. The trustees have also set aside a designated fund of £15,000 towards the dilapidation costs expected at the end of the office lease. The policy is reviewed each year, and sooner if a major funding change occurs. At the year-end, free reserves were £102,000.

Illustrative example 3: Harbourlight Festival — a charity with volatile income, below target (~£140,000)

Harbourlight Festival is a fictional arts charity whose income is seasonal and uncertain, rising and falling with sponsorship, grants and ticket sales around its annual festival. Volatile income and fixed year-round costs justify a higher reserve — but the charity is currently below its target, so its policy also sets out an honest plan to rebuild. This is what a policy looks like when reserves are not yet where they should be.

Illustrative reserves policy — Harbourlight Festival

Harbourlight Festival’s income is seasonal and uncertain, depending on sponsorship, grants and ticket sales that vary from year to year around its annual festival. To protect the charity against a poor year and to meet its fixed costs between festivals, the trustees aim to hold free reserves of around six months’ core running costs — currently about £45,000. Free reserves exclude restricted grants and amounts already committed to the next festival. At the year-end, free reserves were £30,000, below the target. The trustees have agreed a plan to rebuild reserves over three years by allocating any annual surplus to reserves and reducing fixed costs, and will report progress each year. The policy is reviewed annually.

How to set your own reserves target

Notice the pattern across the three examples: the steadier and simpler a charity’s finances, the less it needs to hold; the more volatile its income or the heavier its commitments, the more. Oakvale, with stable income and few costs, targets three to six months; Brightway, with staff and a lease, ties its target to the risk of losing a funder; Harbourlight, with lumpy seasonal income, aims higher still. Your own target sits somewhere on that spectrum, set by your own risks.

There is no formula, but there is a method. List your charity’s main financial risks — how volatile your income is, how much depends on one or two funders, what fixed commitments you carry (salaries, leases, contracts), and how quickly you could raise money or cut costs. Then judge how long a buffer you would need to weather a realistic shock, and set your target around that. Write down the level, the reasoning, what you count as free reserves, and when you will review it.

A simple way to start is to estimate your essential monthly running costs — the things you must pay even in a bad month, such as salaries, rent and insurance — and multiply by the number of months you judge you would need to respond to a serious income shock. A charity that could cut costs or raise money quickly might need only two or three months; one with staff, a lease and concentrated funding might need more. The result is a starting target to test against your risks and adjust, not a precise answer — the reasoning matters more than the arithmetic.

The commonest mistakes are stating a figure with no reasoning, copying another charity’s percentage, and forgetting to exclude restricted and designated funds so the free-reserves figure is overstated. Writing a policy once and never revisiting it is another: circumstances change, so review yours each year and whenever you win or lose a major grant. Each example here avoids these — the level is tied to real risks, the free-reserves definition is explicit, and the policy names a review point.

Two cautions. Do not set a target so high that you cannot explain why the money is not being spent on the cause — funders will ask. And do not treat the policy as fixed: review it each year and whenever your circumstances change, such as winning or losing a major grant. Work out your free reserves with the reserves calculator, read the underlying ideas in the free reserves, restricted funds and designated funds glossary entries, and see how reserves fit into financial oversight in the Trustee & Governance Handbook. Your reserves policy and the level held should also be stated in your Trustees’ Annual Report.

Last reviewed: July 2026 · Reviewed by Ivan Siyanko. All three examples are illustrative and fictional; figures are invented and not benchmarks.