How to set a reserves policy for your charity and report on its reserves in your trustees’ annual report.
Charity financial reserves: the law
Keep money aside as a reserve to protect your charity against drops in income or allow it to take advantage of new opportunities. Your charity’s reserves can be spent on any of its aims.
By law, your charity must spend income it receives within a reasonable period of time unless there’s a good reason not to.
This means you need to be clear about your reasons for keeping reserves. Write a reserves policy to explain to others why you are setting money aside rather than spending it on your charity’s aims.
The Charity Commission’s guidance on charity reserves gives more information on writing a reserves policy.
How to set a reserves policy
Your reserves policy should set out:
- how much your charity needs to hold in reserve and why
- how and when your charity’s reserves can be spent
- how often the reserves policy will be reviewed
You can set aside enough money to meet a potential need, such as an unexpected drop in income. If you set aside money for a specific purpose, such as building works, make it clear that this is separate from the charity’s general reserves.
Review your reserves policy regularly to make sure you aren’t setting aside too much or too little.
Trustees’ annual reports: how to report on reserves
Use your trustees’ annual report to tell donors, funders and other stakeholders:
- why you need to keep money aside instead of spending it on your charity’s aims
- how much your charity holds in reserve
- why your charity needs to hold this amount in reserve
- what your charity’s reserves can be spent on
If you are preparing accruals accounts, by law you must set out your reserves policy – or reasons for not holding reserves – in your trustees’ annual report.