Managing reserves

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.

Building reserves is not easy. If you are starting from having no or minimal reserves, it may take a few years to build up the level you need. To accelerate this, you can consider what you can feasibly do to raise extra funds, for example: hosting fundraising events and activities, or raising the costs of membership (while ensuring it’s still affordable to people on low incomes). It’s important to explain your approach to anyone who will be involved or affected by your fundraising efforts so that they know what you are doing and why and how improving your financial management will benefit the organisations, its existing and future beneficiaries.

When looking for somewhere to keep your reserves, it’s important to get independent advice from an appropriate source. The important thing to remember is that your reserves need to be readily available, by this we mean you should have instant access to them and protected.

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.

Once a reserves policy is set, it should be regularly reviewed. There are no hard and fast rules so you should do what’s right for your organisation. It’s important to review the amount you hold in reserves throughout the course of the year and report back on it regularly to your committee and/or finance sub-group if you have one. Reviewing your policy annually can enable you to tie it into your usual budgetary processes and consider its effectiveness and ongoing appropriateness in light of; any changes your financial situation, the wider financial and funding climate, and any other issues, risks and opportunities you face.