The term reserves is used to describe money that is freely and readily available to your organisation to spend. Reserves are funds that you have built up and put aside in case you need them. They must only be spent to further the aims of your organisation.
When considering any reserves you may have, it’s important to exclude:
- Any tangible fixed assets you may own like a clubhouse, land or equipment.
- Any funds you hold that are restricted or ringfenced for specific things like projects, programmes or other purposes for example; sinking funds for replacing equipment/surfaces, volunteer training budgets and pension provision.
- Long-term investments that you cannot readily access for example, in accounts that require you give notice.
- Funds that are set aside to cover debtors or costs you are expecting to incur.
Why is it important to have reserves?
It’s important to have reserves so that your organisation:
- Can protect the continuity of its core work, the services and activities that are essential for your beneficiaries.
- Can build its resilience and help to safeguard its own future.
- Has enough money available to meet your on-going financial obligations if your regular income streams are disrupted or decrease unexpectedly.
- Can manage financially in emergency situations such as a fire, flood, pandemic or having to move to a more expensive facility.
- Can take advantage of unexpected opportunities that further your aims.
What is a reserves policy?
A reserves policy sets out your organisation’s agreed approach to reserves. It helps you to:
- Justify why you keep reserves (or why you don’t).
- Explain the risks and costs you have considered when setting the goal for your reserves.
- Articulate how much you have decided to hold in reserve and why.
- Detail when it’s appropriate to spend reserves, how they can be spent and any authorisation processes.
- Set out how will monitor and report on your reserves.
- Detail how often the policy will be reviewed and by who.
Should we have a reserves policy?
It is beneficial for all organisations to have a reserves policy in place. Depending on how your organisation is structured, you may be expected to create, publish, implement, and monitor your reserves policy in order to comply with your legal duties so be sure to check with your financial and legal advisors. For example, charities are required to report their reserves policy in their Annual Report in a way that meets the requirements of the Charities Statement of Recommended Practice (SORP, FRS 102) and the requirements of the Regulations.
What are the benefits of having a reserves policy?
There are many benefits of having a reserves policy in place. It can help:
- You to provide assurances that your organisation is well managed.
- Give confidence that your reserves level matches the needs of your organisation at the time or that you have a plan in place to build up your reserves to an appropriate level.
- To make sure that the reserves you hold are neither too high or too low to meet your needs.
- You to explain your approach to reserves to your participants, members, volunteers, stakeholders and any funders or investors.
- You take a pro-active approach to balancing the needs of current and future beneficiaries.
Every organisation is different, and it is important that your reserves policy reflects the unique circumstances and financial position of your organisation. It is important to consult an appropriately qualified source or advisor to determine if there are any legal duties that your policy needs to reflect. Examples of some of the areas you might want to consider including in your policy include (this list is not considered to be exhaustive):
- Aims – The agreed aims of your organisation, the reasons why you exist.
- Purpose – The purpose of having a reserves policy.
- Definition – The definition of reserves you have adopted when writing your policy.
- Operating context – A high level overview of the size and complexity of your organisation, its asset base, people base (including any staff), contracts, governance structure, normal operating costs, how you usually generate your income, your trading history, and the stability of your operating environment.
- Risk – Your organisation’s approach to risk and risk management, an overview of the financial risks you face and your approach to managing these risks. This will help inform the amount of reserves you might need.
- Reserve amount(s) – The minimum and maximum amount of reserves that you need and why. It’s advisable to include an explanation of how you have arrived at these figures.
- Use of reserves – What can your reserves be used for and what are the authorisation processes if you need to go through to be able to use them?
- Funding of reserves – How you will raise the money needed for your reserves and what steps you will take to maintain them at the agreed level. It’s important to explain any shortfalls or excesses and any action you plan to take to bring them in line with your target.
- Accounting for reserves – How you will record your reserves in your financial records and where the funds will be held so that they are readily available if/when you need them.
- Implementation – How you will implement your policy and who will be responsible for doing this?
- Links to other policies and plans - How your policy links to other governance and financial policies, your legal structure, and your strategic and operational plans.
- Monitoring, reporting and review – How will you ensure that you monitor your reserves and their usage? Who is responsible for this and who will they report to? How often will you review your reserves policy and who is responsible for doing this?
Think carefully about the how you write your policy. It’s important demonstrate that you have thoughtfully and thoroughly considered your costs and the risks you might face. Try and stay focussed on striving to protect the continuity of your core offer as opposed to applying a formula.
The amount of reserves you need will depend entirely on the unique needs and circumstances of your organisation. There is no hard and fast rule on what this figure should be. The amount you need will largely be determined by the scale and complexity of your activities and structures. Organisations that offer a wide range of activities, lease or own their own facilities and employ staff or contractors are likely to need bigger reserves than an organisation that has one team and hires a local pitch for training and matches. When determining the amount of reserves required it is important to consider:
- The risks of unforeseen emergencies and the impact this might have on your income and expenditure. For example, flooding, fire, pandemics, losing access to your facility, etc.
- Whether you have any restricted funds put aside for specific uses.
- Your income falling below expectations, for example membership income being lower than expected, grant income stopping or sponsorship not being renewed.
- Covering unforeseen operational costs, for example having to cover unforeseen legal or staffing costs, replacing equipment that breaks unexpectedly or increases in insurance premiums.
- Covering redundancy costs and / or any pension liabilities.
- Opportunities that may arise to further the aims of your organisation, for example providing match funding for a grant.
The risks and opportunities you identify will influence how much you decide to hold in reserve (or not) and should be explained in your policy.
It’s important to consult your accountant or an appropriate source about your reserve amounts so that they are fully considered as part of your general approach to the financial management of your organisation.
If your reserves are too low, your organisation may be financially vulnerable. Any future funders or partners may see you having low or no reserves as a risk. If something unexpected were to happen or an emergency or crisis situation was to arise you risk being unable to meet your outgoings or commitments and the future of your organisation could be at risk. At worst, your organisation may become insolvent and have to fold. If you are an unincorporated organisation, its important to remember that your individual members can be personally responsible for any debts and contractual obligations you may have. Protecting them against this is important.
If your reserves are too high, this could:
- Lead to challenge, from your members, workforce or funders, on why these funds haven’t been invested in furthering your aims and increasing your organisation’s resilience.
- Reduce the perceived financial need of your organisation making it more difficult to attract grants, donations or good will or fundraising events.
- Put you be in breach of your regulations, for example, charities are required to use excess reserves to further the aims and objectives of their organisation.