Writing a reserves policy funders will believe

Why your reserves policy matters more than you think

For most charities and CICs, a robust and well-articulated reserves policy isn't just a regulatory requirement; it's a badge of resilience and a testament to good governance. While often seen as a dry, administrative task, your reserves policy plays a critical role in demonstrating to trustees, auditors, and crucially, funders, that your organisation is well-managed and financially sound. It shows you've thought about your future, understood your risks, and put plans in place to ensure your vital work can continue even when unexpected circumstances arise.

Funders, in particular, will scrutinise your reserves policy. They want assurance that their philanthropic investment will be used effectively and that your organisation won't collapse at the first sign of trouble. A well-justified reserves policy communicates stability and demonstrates a responsible approach to financial stewardship, making your organisation a more attractive prospect for funding.

It's not about hoarding money; it's about safeguarding your mission. This guide will walk you through the essential components of a funder-ready reserves policy, explaining what it is, why it's so important, and how to write one that stands up to scrutiny.

Key takeaways

• Your reserves policy should state a target range in months of unrestricted expenditure.
• Justify your target range by identifying and quantifying key risks.
• Ensure your policy is formally reviewed by trustees at least annually.
• Communicate your policy clearly and consistently to all stakeholders, especially funders.

Understanding what 'reserves' really means

Before diving into policy specifics, let's clarify what we mean by 'reserves'. In the charity sector, reserves typically refer to that part of a charity's unrestricted funds that is freely available to spend for any of the charity’s charitable purposes. It’s important to distinguish these from other types of funds:

• Restricted funds: Money given for a specific purpose, which can only be spent on that purpose.
• Endowment funds: Funds held permanently, where only the income generated, or sometimes the capital, can be spent.
• Designated funds: Unrestricted funds that the trustees have set aside for a particular future project or commitment. While 'designated', these funds remain legally unrestricted and the designation can be changed by trustees.

Your reserves policy focuses purely on those unrestricted, undesignated funds – the safety net. The Charity Commission for England and Wales (CCEW) provides clear guidance (CC19) on this, emphasising the need for charities to have appropriate reserves to ensure their long-term viability. For CICs, while specific regulatory guidance differs, the principle of financial prudence and stability is equally vital for stakeholders and funders.

Setting your target reserves level: The 'how much' question

This is often the trickiest part. There's no one-size-fits-all answer, but best practice dictates expressing your target reserves as a range, typically in months of unrestricted expenditure. This provides flexibility and accounts for natural fluctuations.

A common range might be 'three to six months of unrestricted expenditure', but this needs to be rigorously justified based on your specific organisational circumstances and risks. Factors to consider when setting your target include:

• Funding uncertainty: Do you rely heavily on a few large grants? Is your income unpredictable?
• Operational risks: Could a major piece of equipment fail? Do you have significant fixed costs?
• Future plans: Are you planning to expand or move premises, incurring costs before new income arrives?
• Contingency for unexpected events: What if a key funder withdraws or a major project is delayed?
• Charity size and complexity: Larger organisations may need more substantial reserves to manage their bigger cost base and potential liabilities.

"A strong reserves policy isn't about hoarding money; it's about ensuring your charity can deliver its mission sustainably, even when the unexpected happens, and that's exactly what funders want to see." - Serin Editorial Team

Justifying your reserves: The 'why' behind the 'how much'

This is where your policy truly comes alive and convinces funders. You need to clearly articulate the rationale for your chosen reserves range. This involves a comprehensive risk assessment.

Consider a table detailing potential risks and the associated financial impact:

Your policy should clearly state how much of your reserves are dedicated to covering each category of risk, or at least how the overall target range accounts for a range of identified risks. This demonstrates a thoughtful, strategic approach, rather than an arbitrary figure.

The essential components of a robust reserves policy

Beyond the target and its justification, a complete reserves policy needs several other key elements:

1. Purpose of the policy: A clear opening statement explaining why the policy exists.
2. Definition of reserves: Explaining what constitutes 'reserves' in the context of your organisation.
3. Target reserves level: Clearly stated (e.g., '3 to 6 months of unrestricted expenditure').
4. Justification of the target: A detailed explanation based on risks, as discussed above.
5. Reserves management and monitoring: How often reserves are reviewed, by whom, and what action is taken if reserves fall outside the target range.
6. Investment policy for reserves: How reserves are held and invested (e.g., separate bank account, low-risk investments).
7. Authorisation for use: Who can authorise the use of reserves and under what circumstances.
8. Approval and review cycle: When the policy was last approved by trustees and the schedule for future reviews (typically annually).

Ensure that the language is plain English and easily understandable by all stakeholders, not just finance professionals.

Communicating your reserves policy to funders

Having a brilliant policy tucked away on a server isn't enough. You need to be able to communicate it effectively. Funders will often ask for a copy of your reserves policy as part of their due diligence, or they may ask specific questions about your financial stability in application forms.

When presenting your policy or discussing your reserves, be confident and clear:

• Be transparent about your current reserves: It's okay if you're not at your target yet, as long as you have a plan to get there.
• Explain the 'why': Always link your target to your risk assessment and the sustainability of your mission.
• Highlight trustee oversight: Emphasise that your trustees regularly review and approve the policy.
• Don't apologise: Appropriate reserves are a sign of strength, not a sign of having 'too much' money.

Think of your reserves policy as a vital part of your organisation's funding narrative. It underscores your reliability and commitment to long-term impact.

Next steps

Review your existing reserves policy against the points raised in this guide. If you don't have one, make it a priority to draft one, working closely with your treasurer and trustees. Ensure it's formally adopted at a trustee meeting and minuted. Then, integrate its key messages into your funding applications and annual reports. Remember, a well-crafted and understood reserves policy is a powerful tool for demonstrating the resilience and professionalism of your charity or CIC, reassuring funders that their investment is safe and impactful.