Many organisations run into challenges not because they lack reserves, but because they misunderstand or mismanage them. Here are some common mistakes to avoid:
If you’re a charity trustee in the UK, you’ve probably heard reserve policy often in board meetings, but what does it actually mean and more importantly, how do you get your reserves policy sorted without getting buried in jargon? Think of your charity’s reserves like a household emergency fund. You wouldn’t spend every penny that comes through your door, would you? You’d keep something back for when the boiler breaks or the car needs new tyres. Your charity needs the same safety net, but the rules around how much you can keep and what you can do with it are a bit more involved.
Did you know nearly 40% of charities in the UK have less than three months of money saved? This makes them very vulnerable to sudden costs and bad economic times. As a charity trustee, it’s very important to make sure your charity has enough money saved for the future.
A good reserves policy can help you deal with money problems and keep your charity’s work going.
This way, you’ll be ready to get the money you need to grow your business. In addition to these, this post will go in depth on all the details you need to succeed, keep reading. To get Series A investment, startups must show they are financially healthy. You need to keep accurate records and manage money well. It’s also important to understand your financial situation clearly. A startup’s money health is key to getting investors and nvestors want to see a clear money plan and a strong financial setup.
In plain terms, reserves are the funds your charity has available to spend. They’re not locked away in a building or tied up in a contractual agreement, they’re genuinely free to use however your trustees decide, within your charitable purposes, of course. Here’s the thing, not all money sitting in your bank account counts as reserves. Some of it might be earmarked for specific projects or have conditions attached by funders. That’s where understanding the different types of funds becomes crucial.
Unrestricted reserves are the funds you have complete freedom to spend on any charitable activity that fits your purposes. No strings attached, no donor telling you what to do with it. This is your most flexible money. This is the money that gives your charity financial stability and allows you to respond to opportunities or challenges as they arise.
Perhaps your community centre needs urgent roof repairs, or you’ve spotted a chance to expand a successful programme. Unrestricted reserves let you act without having to launch a fundraising campaign first. These reserves might come from various sources: regular donations, income from trading activities, investment returns, or fundraising events where donors didn’t specify how their money should be used.
Every charity has to manage two main classes of money: restricted and unrestricted funds.
Restricted funds come with conditions. You cannot use that money for anything else, even if something more urgent crops up. That’s the deal you’ve accepted. These restricted funds don’t count towards your reserves because you’re not free to use them however you choose, they’re already spoken for.
Unrestricted funds, on the other hand, have no such limitations. Donors have given you this money trusting that you’ll use it wisely for your charitable work, but they haven’t specified exactly how. This freedom is what makes unrestricted funds so valuable. Understanding this distinction matters because it affects everything from your financial planning and financial reporting to what you tell stakeholders about your financial health.
Designated funds sit within your unrestricted funds, but your trustees have decided to earmark them for a particular purpose. That money is still unrestricted in the legal sense; you could change your mind and use it for something else if necessary. But you’ve designated it internally for that specific purpose. It helps with planning and shows stakeholders that you’re thinking ahead. The key difference between designated and restricted funds is who made the decision. Restricted funds are restricted by external parties (donors, funders), designated funds are set aside by your own trustees and can be un-designated if circumstances change.
When you’re calculating your reserves, designated funds are included because they’re still technically available. However, you should explain these designations in your accounts and reserves policy so people understand what you’re planning.
This is the question that causes the most anxiety among trustees, and there’s no legal maximum on how much reserves you can hold. The Charity Commission doesn’t impose a cap on reserves but you do need to justify whatever level you’re holding. If you’re sitting on significant reserves, you need to explain why that’s appropriate for your charity. Perhaps you’re saving for a major capital project, or your income is particularly uncertain, or you need funds to cover long redundancy notice periods.
Conversely, having very low reserves isn’t necessarily wrong either, as long as you’ve assessed the risks and have a plan. Some charities operate on a hand-to-mouth basis by design, perhaps because they can quickly scale back activities if funding dries up.
When you’re calculating your reserves, designated funds are included because they’re still technically available. However, you should explain these designations in your accounts and reserves policy so people understand what you’re planning.
Your financial reports should show your company’s money performance clearly. Investors check these to see if your startup is good and can make money for them. It’s important to make sure your reports are right and full.
Conversely, having very low reserves isn’t necessarily wrong either, as long as you’ve assessed the risks and have a plan. Some charities operate on a hand-to-mouth basis by design, perhaps because they can quickly scale back activities if funding dries up.
When you’re calculating your reserves, designated funds are included because they’re still technically available. However, you should explain these designations in your accounts and reserves policy so people understand what you’re planning.
There’s no one-size-fits-all answer for setting your reserve target, but here’s a practical approach: Start by looking at your regular running costs. How much do you spend each month on staff, rent, utilities, and other ongoing expenses? Many charities aim to hold somewhere between three and six months of these costs as reserves. But you need to consider your specific risk factors:
If your funding is unpredictable perhaps you rely heavily on a few large grants that could disappear, you’ll want higher reserves than a charity with steady, diverse income.
Your reports should have a balance sheet and an income statement at least. The balance sheet shows your company’s money situation at one time and the income statement shows your money coming in and going out over time. These must follow standard money rules to be clear and trusted.
Are you saving for a specific project or purchase? Factor this into your calculations.
Could you quickly reduce costs if needed, or would winding down take time? This affects how much buffer you need.
If you own your building, you might need higher reserves for maintenance and repairs.
Many organisations run into challenges not because they lack reserves, but because they misunderstand or mismanage them. Here are some common mistakes to avoid:
Your reserves figure isn’t necessarily what’s in your bank account. Some cash might be restricted, and some reserves might be
Having a reserve policy that nobody’s looked at since it was written isn’t helpful. Review it annually and update it when circumstances change.
Setting a reserves target of twelve months’ running costs sounds sensible, but if you’re currently at zero, how will you realistically get there? Be honest about what’s achievable.
Your gross margin shows if your business can make money. It’s the difference between what you earn and what it costs to make your product, divided by what you earn. A high margin means your business could grow a lot. To show you can make money, do this: look at your gross margins to find ways to make more money and plan how you’ll make money, maybe by cutting costs and growing your sales.
When you make decisions about reserves, designating funds, adjusting your target, spending reserves, record the reasoning.
First, get clarity on what you’re working with. Look at your current funds and separate out what’s restricted, what’s designated, and what’s genuinely free reserves. Next, assess your risk. What could go wrong financially? What would you need to cover if your main income source disappeared tomorrow? Then, set a realistic target. It doesn’t have to be perfect, you can adjust it later as you learn more.
Finally, write it down. Your reserves policy doesn’t need to be a lengthy document. A few paragraphs explaining your target level, how you calculated it, and how you’ll monitor it is sufficient. Remember, having a reserves policy isn’t just about ticking a compliance box. It’s about ensuring your charity can weather storms, seize opportunities, and keep serving your beneficiaries whatever challenges arise. Managing reserves well is one of the most important responsibilities you have as a trustee. Get it right, and you’ll give your charity the financial stability it needs to do brilliant work for years to come.
It’s important to manage your burn rate and know your runway as investors look for a clear plan for your money. Burn rate management means watching your spending and keeping enough cash for important goals.
Your story should talk about any money problems you’ve had and how you fixed them. This shows you can handle tough times so be open about past issues and what you did to solve them, like cutting costs or getting more money.
Getting your tech startup ready for Series A funding is key. You need a strong financial base to make your case stronger to investors. For a Series A, it’s not just about your product, you must show off your financial skills. This includes knowing your numbers, having a clear cap table, and a solid financial plan.
Follow the tips in this article to get your startup ready. This means having all your financial papers in order and you also need to know your sales, costs, and how much money you need. With a strong financial setup, you can tackle the Series A process and grow your business. Ready to raise your Series A with confidence? We work alongside ambitious tech founders to build the financial infrastructure investors trust. From messy spreadsheets to professional management accounts, we’ll get you where you need to be. Start a conversation with our team.
It depends on whether the grant is restricted or unrestricted. If the funder specified what the money should be used for, it’s restricted and doesn’t count as reserves. If they gave you the grant to use at your discretion for general charitable purposes, it’s unrestricted and does count. Check your funding agreement to be sure.
A: Probably, yes. Income volatility is a key risk factor. If one or two funders pull out, you could face a serious shortfall. Higher reserves give you breathing room to find alternative funding or adjust your activities. Document this reasoning in your reserves policy it’s a perfectly valid justification for holding more substantial reserves.
Yes. Reserves don’t have to be cash in the bank. Many charities invest their reserves to generate returns, as long as the investments are appropriate for your needs and accessible when required. Just make sure you understand the risks and have investment policies in place. Some reserves should remain liquid for immediate needs.
It’s normal for new charities to start with little or no reserves. Your policy should acknowledge this and set out a realistic plan to build reserves over time. Be honest about the risks this creates and how you’ll manage them. Focus on building stability gradually while delivering your charitable purposes.
Yes. Your policy should explain why low or zero reserves are appropriate for your operating model. Perhaps you can quickly scale activities up or down based on funding, or you operate with minimal fixed costs. Document this conscious decision and the risks you’ve assessed. Having deliberately low reserves with proper justification is very different from accidentally having no reserves because you haven’t thought about it.
Any remaining reserves (unrestricted funds) must be transferred to other charities with similar purposes. You can’t just distribute them to trustees or staff. Restricted funds should be returned to funders or transferred to other charities to be used for the originally intended purpose
Progress starts with understanding.
Our accounting and advisory experts partner with organisations across the UK to provide insight that supports confident decisions — today and for the future.
Share a few details and a member of our team will contact you to explore how Moracle can support your organisation.